UPM annual report 2014

Revenue recognition Group's sales mainly comprises of sale of energy, pulp, sawn timber, papers, self-adhesive label materials and plywood. Sales are recognised when it is probable that future economic bene- fits will flow to the entity, the associated costs and the amount of revenue can be measured reliably, the risks and rewards of ownership have trans- ferred to the buyer and the Group has neither continuing managerial involvement with the goods nor a continuing right to dispose of the goods nor effective control of those goods. The timing of revenue recog- nition is largely dependent on delivery terms. Group terms of delivery are based on Incoterms 2010, the official rules for interpretation of trade terms issued by the International Chamber of Commerce. Revenue is recorded 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 on Carrier (“FCA”), Carriage paid to (“CPT”) or Carriage and Insurance Paid to ("CIP"), revenue is recorded at the time of shipment. Revenues from services are recorded when the service has been per- formed. Sales are recognised net of indirect sales taxes, discounts, rebates and exchange differences on sales under hedge accounting. The costs of distributing products sold are included in costs and expenses. Dividend income is recognised when the right to receive a payment is established. Interest income is recognised by applying the effective interest rate method. Income taxes The Group’s income taxes include current income taxes of Group com- panies based on taxable profit for the financial period, together with tax adjustments for previous periods and the change of deferred income taxes. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial state- ments. However, deferred income taxes are not recognised if they arise from initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, does not affect either accounting or taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associated companies and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised to the extent that it is probable that there will be future taxable profits against which the tem- porary differences can be utilised. Special items Certain financial performance indicators have been reported excluding special items. These indicators are non-GAAP measures applied in the Group's financial statements to eliminate the income statement impact of certain significant transactions which are unusual or infrequent in nature. The Group believes that non-GAAP measures enhance the understanding of the historical performance. Any measures derived with eliminating special items are not measures of financial reporting under the IFRS, and they may not be comparable to other similarly titled measures of other companies. In the UPM Biorefining, UPM Paper Asia and UPM Paper ENA segments the transaction (income or expense) is considered to be special item, if the impact is one cent (EUR 0.01) after tax per share or more, and if it arises from asset impairments, asset sales or restructuring mea- sures, or relate to changes in legislation or legal proceedings. In other segments the impact is considered to be significant if it exceeds EUR 1 million pre-tax.

Intangible assets Intangible assets with finite lives are carried at historical cost less amorti- sation. Amortisation is based on the following estimated useful lives:

cally, over the compliance period to which the corresponding emission rights relate. The emissions realised are expensed under other operating costs and expenses in the income statement and presented as a provision in the balance sheet. Emission rights and associated provisions are derec- ognised when disposed. Any profit or loss on disposal is recognised in the income statement. Property, plant and equipment Property, plant and equipment acquired by Group companies are stated at historical cost. Assets of acquired subsidiaries are stated at fair value at the date of acquisition. Depreciation is calculated on a straight-line basis and the carrying value is adjusted for impairment charges, if any. The carrying value of property, plant and equipment on the balance sheet represents the cost less accumulated depreciation and any impair- ment charges. Borrowing costs incurred for the construction of any qualifying assets are capitalised during the period of time required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. Land is not depreciated. Depreciation of other assets is based on the following estimated useful lives: Expected useful lives of assets are reviewed at each balance sheet date and, where they differ significantly from previous estimates, depreci- ation periods are changed prospectively. Subsequent costs are included in the asset’s carrying amount or rec- ognised as a separate asset, as appropriate, only when it is probable that the future economic benefit associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and main- tenance are charged to the income statement during the financial period in which they are incurred. Major renovations are depreciated over the remaining useful life of the related asset or to the date of the next major renovation, whichever is sooner. Gains and losses on disposals are determined by comparing the dis- posal proceeds with the carrying amount and are included in operating profit. Assets accounted under IFRS 5 that are to be disposed of are reported at the lower of the carrying amount and the fair value less sell- ing costs. Government grants Grants from the government are recognised at their 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 recognised as a reduction to the depreciation charge of the related asset. Other government grants are recognised in the income statement in the period necessary to match them with the costs they are intended to compensate. Investment property Investment property includes real estate investments such as flats and other premises occupied by third parties. Investment property is treated as a long-term investment and is stated at historical cost. Depreciation is calculated on a straight-line basis and the carrying value is adjusted for impairment charges, if any. Useful lives are the same as for property, plant and equipment. The bal- ance sheet value of investment property reflects the cost less accumulated depreciation and any impairment charges. Biological assets Biological assets (i.e. living trees) are measured at their fair value less estimated costs to sell. The fair value of biological assets other than young seedling stands is based on discounted cash flows from continuous operations. The fair value of young seedling stands is the actual refores- tation cost of those stands. Continuous operations, the maintenance of Buildings 25–40 years Heavy machinery 15–20 years Light machinery and equipment 5–15 years

currently existing seedling stands and the felling of forests during one rotation, are based on the Group’s forest management guidelines. The calculation takes into account growth potential, environmental restric- tions and other forests conditions. Felling revenues and maintenance costs are calculated on the basis of actual costs and prices, taking into account the Group’s projection of future price development. Periodic changes resulting from growth, felling, prices, discount rate, costs and other premise changes are included in operating profit on the income statement. Financial assets Financial assets have been classified into the following categories: finan- cial assets at fair value through profit or loss, loans and receivables and available-for-sale investments. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of financial assets at initial recognition. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all the risks and rewards of owner- ship. Financial assets at fair value through profit or loss are financial assets held for trading. Derivatives are categorised as held for trading, unless they are designated as hedges. These are measured at fair value and any gains or losses from subsequent measurement are recognised in the income statement. The Group has not used the option of designating financial assets upon initial recognition as financial assets at fair value through profit or loss. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in non-current assets unless they mature within 12 months of the balance sheet date. Loan receivables that have a fixed maturity are measured at amortised cost using the effective interest method. Loan receivables are impaired if the carrying amount is greater than the esti- mated recoverable amount. Trade receivables are non-derivatives that are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. Provision for impairment is charged to the income state- ment when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, or default or delinquency in payments more than 90 days overdue are considered indicators that the trade receivable may be irrecoverable. Subsequent recoveries of amounts previously written off are credited to the income statement. Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other catego- ries. They are included in non-current assets unless they are intended to be disposed of within 12 months of the balance sheet date. Purchases and sales of financial investments are recognised on the settlement date, which is the date that the asset is delivered to or by the Group. Invest- ments are initially recognised at cost, including transaction costs, and subsequently carried at fair value. Unrealised gains and losses arising from changes in the fair value of investments classified as available-for-sale are recognised in other com- prehensive income. When investments classified as available-for-sale are sold or impaired, the accumulated fair value adjustments in equity are included in the income statement as gains and losses from available-for- sale investments. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for- sale, a significant or prolonged decline in the fair value of the security below its cost is considered when determining whether the investments are impaired. If any such evidence exists for available-for-sale invest- ments, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity investments are not subse- quently reversed through the income statement.

Computer software Other intangible assets

3–5 years 5–10 years

Goodwill and other intangible assets that are deemed to have an indefinite life are not amortised, but are tested annually for impairment.

Goodwill Goodwill represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisi- tion date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets of the acquired subsidiary, associated company or joint arrangement at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associated companies and joint ventures is included in investments in associated companies and joint ventures and is tested for impairment as part of the overall balance. Goodwill is ini- tially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indi- cation that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the difference is an impairment loss, which is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Research and development Research and development costs are expensed as incurred, except for certain development costs, which are capitalised when it is probable that a development project will generate future economic benefits, and the cost can be measured reliably. Capitalised development costs are amor- tised on a systematic basis over their expected useful lives, usually not exceeding five years. Computer software Costs associated with maintaining computer software programmes and costs related to the preliminary project phase of internally developed software are recognised as an expense as incurred. Development costs relating to the application development phase of internally developed software are capitalised as intangible assets. Capitalised costs include external direct costs of material and services and an appropriate portion of the software development teams' relevant overheads. Computer soft- ware development costs recognised as assets are amortised using the straight-line method over their useful lives. Other intangible assets Separately acquired patents, trademarks and licences with a finite useful life are recognised at cost less accumulated amortisation and impair- ment. Contractual customer relationships or other intangible assets acquired in a business combination are recognised at fair value at the acquisition date. Amortisation is calculated using the straight-line meth- od over their estimated useful lives. Other intangible assets that are deemed to have an indefinite life are not amortised and are tested annu- ally for impairment. Emission rights The Group participates in government schemes aimed at reducing green- house gas emissions. Emission rights received from governments free of charge are initially recognised as intangible assets based on market value at the date of initial recognition. Emission rights are not amortised but are recognised at an amount not exceeding their market value at the balance sheet date. Government grants are recognised as deferred in- come in the balance sheet at the same time as emission rights and are recognised in other operating income in the income statement, systemati-

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UPM Annual Report 2014

UPM Annual Report 2014