UPM Annual Report 2023

ACCOUNTS FOR 2023

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Effect of a 10% change in prices on operating profit for the year

UPM expects to receive. The variable consideration includes mainly cash discounts and volume rebates that encourage the customer to take specific volumes in a given timescale. In addition, the group gives the customers the right for purchase price refund in case the products do not meet the quality as specified in the agreement. The amount of variable consideration is recognised as a refund liability when some of the amount received is expected to be refunded to the customer. Customer rebates payable to customers in relation to sales made until the end of the reporting period and expected quality claims are estimated using the expected value method, and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. A refund liability is included in trade and other payables. Receivables are recognised when the goods are delivered, and the consideration is unconditional except for the passage of time. For most of UPM’s customer contracts the period between the transfer of goods or services to customers and the receipt of payment is less than 12 months. For these contracts the group has elected to use the practical expedient not to adjust revenue for the effect of financing components. Advance payments received from customers are recognised as contract liability. UPM does not have any contract assets arising from contracts with customers. » Refer Note 4.6 Working capital for information on contract liabilities and refund liabilities.

(74 million) to Germany, EUR 5 million (8 million) to Austria and EUR 4 million (4 million) to UK. In addition, the company receives electricity price compensation in Germany and Finland. The group considers that the conditions related to subsidies have been met. Accordingly, the subsidies have been recorded as income for the period when the subsidy has been received. The authorities monitor the use of subsidies afterwards. Other operating income

Cost structure 2023 EUR 9,316 million

EURm

2023

2022

Papers in UPM Communication Papers Fine and specialty papers in UPM Specialty Papers

340

464

Delivery of own products 10%

Other fixed costs 12%

128 148

139 198

Label materials in UPM Raflatac

Plywood

39 35

51 48 46

Employee costs 14%

Wood and fibre 25%

Sawn timber

Chemical pulp (net effect)

126

EURm

2023 2022

Gains on sale of non-current assets

8

37 12

The figures above illustrate the effects on the operating profit of years 2023 and 2022 only. The biggest factor affecting UPM’s financial results is the sales price of paper. A change in the volume delivered has less than half of the effect of the same percentage change in sales prices. UPM Paso de los Toros pulp mill was ramped up since April 2023. Had the mill operated for the entire year of 2023, the sensitivity to changes in chemical pulp prices would have increased to EUR 190 million.

Energy 10%

Other variable costs 19%

Rental income

10

Emission rights received

154

208

Fillers, coating and chemicals 10%

Derivatives, non-qualifying hedges Exchange rate gains and losses

4

3

-35 88

-47 17

Other Total

Cost structure 2022 EUR 9,470 million

228

231

Emission rights The group has recognised EUR 154 million (208 million) of income in Other operating income and EUR 18 million of expense (70 million of expense) under Other operating costs and expenses relating to CO 2 emissions. The liability to cover the obligation to return emission rights amounted to EUR 56 million (53 million) and is recognised in provisions. The emission rights recognised in intangible assets are specified below:

Delivery of own products 11%

Accounting policies

Other fixed costs 11%

Employee costs 12%

Sales of goods UPM’s performance obligation in the contracts with customers consists of providing the goods specified in the contracts. Revenue from UPM’s product sales is recognised when performance obligation is satisfied, which takes place at point in time when control of the good has been transferred to the customer. In UPM’s customer contracts the transfer of control and thus timing of revenue recognition is largely dependent on delivery terms. Group terms of delivery are based on Incoterms 2020, the official rules for interpretation of trade terms issued by the International Chamber of Commerce. Major part of the sales contracts is on delivery terms basis, whereby delivery is not a promised service to the customer, as the control of a good does not transfer to the customer before shipment. Revenue and the corresponding receivable are recorded at the point in time when the product is delivered to the destination point for terms designated Delivered Duty Paid (“DDP”) or Delivered at Place (“DAP”). For sales transactions designated free of carriage (FCA), revenue is recorded at the time of shipment. For sales transactions designated as Carriage paid to (CPT) or Carriage and Insurance Paid to (CIP), the portion of revenue relating to goods is recorded at the time of loading and the portion of revenue relating to delivery services over time when the service has been performed. UPM sells energy to NordPool electricity market. Revenue is recognised when electricity is transmissed over time. Sales of services UPM provides forest expertise and contracting services to woodland and forestry owners and freight services (free space on group’s vessels sold as freight services). Revenues from services are recorded over time when the service has been performed. Sales of services is very limited and thus the group does not report it separately. Revenue recognition The group recognises revenue as an amount equal to the price specified in the customer contract net of any sales taxes, cash flow hedging results of sales in foreign currency, hedges of energy sales and variable consideration, when applicable. Variable consideration is defined as any variability that may occur between the sales price and the amount

2.3 Operating expenses and other operating income Operating expenses

Wood and fibre 29%

Other variable costs 15%

EURm

2023 2022

Operating expenses excluding forest assets fair value change, wood harvested and share of results of associates and joint ventures are presented below.

Carrying value, at 1 January

235 159 -134

104 231 -100

Fillers, coating and chemicals 10%

Energy 12%

Emission rights received and purchased

Deliveries and disposals

Impairment

-3 -1

— —

EURm

2023 2022

Reclassifications to assets held for sale Carrying value, at 31 December

Auditor’s fees

Costs and expenses Raw materials, consumables and goods

256 260

235 236

6,000 1,287 1,143

6,260 1,181 1,028 1,001 9,470

Accumulated costs

EURm

2023 2022

Employee costs 1)

Accumulated impairments

-4

-1

Audit fee

4.4 0.2 0.3 0.1 5.0

4.0 0.2 0.3 0.1 4.6

Other operating costs and expenses 2) Delivery costs and other external charges

Carrying value, at 31 December

256

235

Audit related services

886

Tax services Other services

Total

9,316

Accounting policies

1) » Refer Note 3 Employee rewards, for further information. 2) Distribution of other operating costs and expenses EURm

Total

In 2023, auditor's fees include EUR 0.2 (0.2) million related to audit services, EUR 0.0 (0.0) million related tax services and EUR 0.1 (0.1) million related to other services paid to PricewaterhouseCoopers Oy. Research and development costs The research and development costs included in operating expenses were EUR 66 million (55 million) in 2023. The focus was on new technologies and developing businesses. Government grants In 2023, government grants recognised as deduction of operating expenses totalled to EUR 16 million (10 million) of which EUR 16 million (8 million) relates to Finland. In addition, the group received emission rights from governments amounting to EUR 154 million (208 million) of which EUR 65 million (122 million) relates to Finland, EUR 79 million

Research and development costs Research and development costs are expensed as incurred, except for certain development costs, which are capitalised as they generate future economic benefits, and UPM can the measure the cost reliably. Capitalised development costs are amortised on a systematic basis over their expected useful lives, usually not exceeding five years. Government grants Government grants are recognised at fair value where there is a reasonable assurance that the grant will be received and the group will comply with the attached conditions. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and accordingly directly reduce the annual depreciation of the underlying asset. Other government grants are recognised in the income statement in the period necessary to match

2023 2022

Rents and lease expenses

23 18

29 70

Emission expenses 1)

Losses on sale of non-current assets

6 4

1 9

Credit losses

Maintenance and other operating expenses 2)

1,092 1,143

919

Total

1,028

1) Emission expenses include gains on sales of emission rights EUR 49 million (losses EUR 2 million). 2) Other operating expenses include, among others, energy as well as expenses related to services and group’s administration.

178

179

UPM ANNUAL REPORT 2023

UPM ANNUAL REPORT 2023

UPM FINANCIAL REPORT 2023

178

UPM FINANCIAL REPORT 2023

179

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