UPM Annual Report 2022

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ACCOUNTS FOR 2022

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Net fair values of derivatives

changes generated by the hedged items. Thereby the hedge ratio between the instrument and the cash flow is 1:1. Ineffectiveness may arise in the highly unlikely case that the forecasted cash flows are no longer expected to occur. Ineffectiveness can also occur in a situation where the hedging instrument with an appropriate maturity is not available in the market for the whole duration of the hedged item. Then the terms of the hedging instrument and the hedged item don't fully match, which causes minor ineffectiveness. There are no other significant sources of ineffectiveness that can reasonably be expected to take place. Ineffectiveness in electricity price hedges may arise in the highly unlikely case that the forecasted cash flows are no longer expected to occur. Ineffectiveness may also arise in case EPAD prices remained negative for a longer period of time, but considering historical price development UPM considers this scenario to be highly unlikely. Hedges of net investments in foreign subsidiaries The fair value changes of forward exchange contracts used in hedging net investments that reflect the change in spot exchange rates are recognised in other comprehensive income within translation reserve. Any gain or loss relating to the interest portion of forward exchange contracts is recognised immediately in the income statement under financial items. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold. The hedging instrument is always made in the same currency as the hedged investment, hence the hedge ratio in net investment hedging is 1:1. For hedging of net investments, ineffectiveness may only arise in the highly unlikely situation where the hedged item is disposed or sold during the duration of the hedging instrument. Fair value hedges The group applies fair value hedge accounting for hedging fixed interest risk on debt. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are prospectively highly effective are recorded in the income statement under financial items, along with any changes in the fair value of the hedged asset or liabilities that are attributable to the hedged risk. The carrying amounts of hedged items and the fair values of hedging instruments are included in interest-bearing assets or liabilities.

Derivatives that are designated and qualify as fair value hedges mature at the same time as hedged items. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the expected period to maturity. Ineffectiveness in fair value hedge of fixed interest risk may arise in case of early redemption of such debt, which is hedged under fair value hedge accounting. The group has not recognised other significant sources of ineffectiveness that can reasonably be expected to take place. The group applies fair value hedge accounting also for hedging firm commitment of a purchase in foreign currency. The currency changes of the hedging instrument are recorded through profit and loss in financial items, until they are recognised as a part of the acquisition cost of a fixed asset. Financial counterparty risk The financial instruments the group has agreed with banks and financial institutions contain an element of risk of the counterparties being unable to meet their obligations. According to the Group Treasury Policy derivative instruments and investments of cash funds may be made only with counterparties meeting certain creditworthiness criteria. The group minimises counterparty risk also by using a number of major banks and financial institutions. Creditworthiness of counterparties is constantly monitored by Treasury and Risk Management. Effect of IBOR reform and significant assumptions Group’s risk exposure that is directly affected by the IBOR reform is fair value hedge accounting of long-term fixed-rate debt for changes in fair value attributable to USD LIBOR which is the current benchmark interest rate. USD LIBOR is currently expected to be published until June 2023. Group currently has only few contracts which reference USD LIBOR and extend beyond June 2023. Group oversees the IBOR transition and follows ISDA and other market guidelines on effects of these changes to UPM’s contracts. In fair value hedging relationships, fair value for both the hedged item and hedging instrument is calculated with identical rate. Therefore no ineffectiveness is expected.

Positive fair values

Negative fair values

Positive fair values

Negative fair values

Net fair values

EURm

2022

2021

Foreign exchange risk Forward foreign exchange contracts Cash flow hedges

-34

-53 -27 -13

-31 -25

Net investment hedge Non-qualifying hedges Cross currency swaps Non-qualifying hedges

-2

— —

-15

-2

—

-16 -68

-16 18

—

-4

Derivatives hedging foreign exchange risk

-97

-63

Interest rate risk Interest rate swaps Fair value hedges

-137

-107

-23

Non-qualifying hedges Cross currency swaps Fair value hedges Non-qualifying hedges

—

-2

—

— —

—

Derivatives hedging interest risk

-139

-77

128

-23

105

Commodity risk Electricity sales

Cash flow hedges

-54

-35

— —

-6

Non-qualifying hedges Electricity purchase Cash flow hedges Other commodities Non-qualifying hedges

—

-2

—

-11

—

-1

—

-3 -9

-2 -8

Derivatives hedging commodity risk

-69

-36 -96

Total

179 34 No derivatives are subject to offsetting in the group’s financial statements. All derivatives are under ISDA or similar master netting agreement. -275 162 -128

Nominal amounts of derivatives

Net fair values of derivatives calculated by counterparty

EURm

2022 1,969 1,102 3,913

2021 2,280 1,081 3,550

POSITIVE FAIR VALUES

NEGATIVE FAIR VALUES

NET FAIR VALUES

Interest rate futures Interest rate swaps

EURm

2022 2021

-185

-96 34

Forward foreign exchange contracts

124

-90

Currency options

—

Cross currency swaps Commodity contracts

149

161

1,744

1,508

Cash collaterals pledged for commodity contracts and interest rate futures totalled EUR 500 (292) million of which EUR 498 (291) million relate to commodity contracts and EUR 2 (1) million to interest rate futures. Cash collaterals are included in Other receivables. » Refer Note 4.6 Working capital.