UPM Annual Report 2022

ACCOUNTS FOR 2022

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

5.4 Financial income and expenses

Fair value measurement hierarchy for financial assets and liabilities EURm 2022

2021

EURm

2022

2021

Level 1 Level 2 Level 3

Total

Level 1 Level 2 Level 3

Total

Exchange rate gains and losses Derivatives

Financial assets Investment funds

8

26 -21

— —

1

— — —

1

— —

100

— — —

100

Exchange gains and losses on financial liabilities measured at amortised costs Exchange gains and losses on financial assets measured at amortised costs

-37 22 29 22

Derivatives, non-qualifying hedges Derivatives under hedge accounting

17

17

13

13

-7

12

150

162

1

148

149

Other exchange rate gains and losses

0

Energy shareholdings

—

—

3,652 3,652

3,652 3,832

—

—

2,579 2,579

2,579 2,841

-1

Total

12

168

1

261

Fair value changes Fair value gains and losses on derivatives designated as fair value hedges

-177 180

-55 53

Financial liabilities Derivatives, non-qualifying hedges Derivatives under hedge accounting

Fair value adjustment of debt attributable to interest rate risk

—

37

— — —

37

—

20

— — —

20

3

-1 -3

46 46

192 229

238 275

6 6

102 122

108 128

Total

25

Total

Interest and other finance income and costs, net Interest expense on lease liabilities

There have been no transfers between levels in 2022 and 2021.

-14 -49 26 -27 -55 -30 9

-12 -35 31

Interest expense on other financial liabilities measured at amortised cost

The different levels of fair value hierarchy used in fair value estimation are defined as follows: Fair values under level 1 Quoted prices (unadjusted) traded in active markets for identical assets or liabilities. Derivatives include futures and commodity forwards traded in exchange. Fair values under level 2 Observable inputs are used as basis for fair value calculations either directly (prices) or indirectly (derived from prices). If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. For investment funds, the valuation is based on quoted prices (unadjusted) for identical assets in markets that are not active. For derivatives, level 2 include OTC derivatives like forward foreign exchange contracts, foreign currency options, interest and currency swaps and commodity swaps. Specific valuation techniques used to value financial instruments at level 2 include the following methods: Interest forward rate agreements (FRA) are fair valued based on quoted market rates on the balance sheet date. Forward foreign exchange contracts are fair valued based on the contract forward rates at the balance sheet date. Foreign currency options are fair valued based on quoted market rates and market volatility rates on the balance sheet date by using the Black&Scholes option valuation model. Interest and currency swap instruments are fair valued as present value of the estimated future cash flows based on observable yield curves. Commodity swaps are fair valued based on quoted forward prices on the balance sheet date. An embedded derivative that is by nature a foreign currency forward contract is valuated at market forward exchange rates and is included in level 2. Embedded derivatives are monitored by the group and the fair value changes are reported in other operating income in the income statement. Fair values under level 3 Financial assets or liabilities of which fair values are not based on observable market data (that is, unobservable inputs) are classified under level 3. This category include UPM’s energy shareholdings and forest assets. Fair valuations are performed at least quarterly by respective business areas or functions. Fair valuations are reviewed by the group finance management and overseen by the Audit Committee. » Refer Note 4.3 Energy shareholdings and » Note 4.2 Forest assets .

Accounting policies

Interest income on derivatives

Interest income on loans, receivables and cash Other financial income and expenses, net

1 2

Fair value through profit or loss This category includes derivatives that do not qualify for hedge accounting and investments funds. They are measured at fair value and any gains or losses from subsequent measurement are recognised in the income statement. Equity instruments at fair value through OCI This category includes mainly UPM’s energy shareholdings. These assets are measured at fair value through other comprehensive income. Financial assets at amortised cost This category comprises loan receivables with fixed or determinable payments that are not quoted in an active market, as well as trade and other receivables, and cash and cash equivalents. They are included in non-current assets unless they mature within 12 months of the balance sheet date. Cash and cash equivalents are always classified as current assets. Loan receivables that have a fixed maturity are measured at amortised cost using the effective interest method. Loan receivables without fixed maturity date are measured at amortised cost. As soon as a loan receivables or cash and cash equivalents are originated or purchased, a loss allowance for 12-month expected credit losses are recognised in profit or loss. If credit risk increases significantly, full lifetime expected credit losses are recognised in profit or loss. In the comparison period, loan receivables were impaired if the carrying amount exceeded the estimated recoverable amount. The credit loss model applied to trade receivables is described in » Note 4.6 Working capital . Derivatives under hedge accounting All derivatives are initially and continuously recognised at fair value in the balance sheet. Gains and losses on remeasurement of derivatives used for hedging purposes are recognised in accordance with the accounting principles described in » Note 6.2 Derivatives and hedge accounting. Financial liabilities measured at amortised cost This category includes debt, trade payables and other financial liabilities. » Refer Note 5.2 Net debt, for further information.

-12 -15

Total

Net gains and losses on derivatives included in the operating profit

EURm

2022

2021

Cash flow hedges reclassified from hedging reserve

-475

-79 -22

Non-qualifying hedges

3

Total

-472

-102

Foreign exchange gains and losses in the operating profit excluding non-qualifying hedges

EURm

2022 2021

Sales

-59 -47

6

Other operating income

-5

Total

-106

1

5.5 Share capital and reserves The company has one series of shares and each share carries one vote. There are no specific terms related to the shares. At 31 December 2022, the number of the company’s shares was 533,735,699. The shares do not have any nominal counter value. The shares are included within the book entry system for securities.

Share capital

2022 2021

Number of shares (1,000)

533,736

533,736

Share capital, EURm

890

890

202

203

UPM ANNUAL REPORT 2022

UPM ANNUAL REPORT 2022

UPM FINANCIAL REPORT 2022

202

UPM FINANCIAL REPORT 2022

203