UPM annual report 2014

Non-current assets held for sale and discontinued operations Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell, if their carrying amount is recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. Non-current assets classified as held for sale, or includ- ed within a disposal group that is classified as held for sale, are not depreciated. A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale and represents a separate major line of business or geographical area of operations, or is a part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale. The post-tax profit or loss from discontinued operations is shown separately in the consolidated income statement. Dividends Dividend distribution to the owners of the parent company is recognised as a liability in the Group’s consolidated financial statements in the period in which the dividends are approved by the parent company’s shareholders. Earnings per share The basic earnings per share are computed using the weighted average number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares out- standing during the period plus the dilutive effect of share options. Adoption of new and revised International Financial Reporting Standards interpretations and amendments to existing standards New and revised standards, interpretations and amendments to existing standards effective in 2014 In 2014, the Group has adopted the following new, revised and amended standards and interpretations: The amendment to IAS 32 Financial Instruments: Presentation on offsetting financial assets and financial liabilities provides clarifications on the application of the offsetting rules. The amendment did not have a significant effect on the Group’s financial statements. Amendment to IAS 36 Impairment of assets: recoverable amount disclosures for non-financial assets. IFRS 13 amended IAS 36 to require disclosures about the recoverable amount of impaired assets. The new amendment clarifies that the scope of those disclosures is limited to the recoverable amount of impaired assets that is based on fair value less costs of disposal. The amendment did not have an impact on the Group’s financial statements. Amendment to IAS 39 Financial Instruments: recognition and mea- surement. A narrow-scope amendment that allows hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central counter- party as a result of laws or regulation, if specific conditions are met. The amendment did not have an impact on the Group’s financial statements. Interpretation IFRIC 21 Levies clarifies the criteria when to recog- nise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 and those where the timing and amount of the levy is certain. The amendment did not have an impact on the Group’s financial statements. Other standards, amendments and interpretations which are effec- tive for the financial year beginning on 1 January 2014 are not material to the Group.

Other post-employment obligations Some Group companies provide post-employment medical and other benefits to their retirees. The entitlement to healthcare benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that for defined benefit pension plans. Valuations of these obligations are carried out by independent qualified actuaries. Share-based compensation Under the Group’s long term incentive plans the Group has granted share options to executive management and key personnel. From 2011 the Group’s long term incentive plans are long-term share incentive plans, a Performance Share Plan for senior executives and a Deferred Bonus Plan for other key employees. These compensation plans are recognised as equity-settled or cash-settled share-based payment transac- tions depending on the settlement. The fair value of the granted options and shares are recognised as indirect employee costs over the vesting period. The fair values of the options granted are determined using the Black-Scholes valuation model on the grant date. Non-market vesting conditions are included in assumptions about the number of options expected to vest. Estimates of the number of exercisable options are revised quarterly and the impact of the revision of original estimates, if any, is recognised in the income statement and equity. The proceeds received, net of any directly attributable transaction costs, are credited to equity when the options are exercised. Under the Performance Share Plan the UPM shares are awarded based on the Group’s financial performance and under the Deferred Bonus Plan share incentives are based on the participants´ short-term incentive targets. Shares are valued using the market rate on the grant date. The settlement is a combination of shares and cash. The Group may obtain the necessary shares by using its treasury shares or may pur- chase shares from the market. Provisions Provisions are recognised when the Group has a present legal or con- structive obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and a reli- able estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when such reimbursement is virtually certain. Restructuring and termination provisions Restructuring provisions are recognised in the period in which the Group becomes legally or constructively committed to payment and when the restructuring plan has been announced publicly. Employee termination charges are recognised when the Group has communicated the plan to the employees affected. Costs related to the ongoing activities of the Group are not provisioned in advance. Environmental provisions Expenditures that result from remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed. The recognition of environmental provi- sions is based on current interpretations of environmental laws and regulations. Such provisions are recognised when it is likely that the liability has been incurred and the amount of such liability can be rea- sonably estimated. Amounts provisioned do not include third-party recoveries. Emission rights Emission obligations are recognised in provisions when the obligation to return emission rights has incurred, based on realised emissions. The provision is recognised based on the carrying amount of emission rights held. In case of deficit in emission rights, the shortage is valued at the market value at the balance sheet date.

transaction costs and the related income tax effects, is included in equity attributable to the owners of the parent company. Interest-bearing liabilities Interest-bearing liabilities are recognised initially at fair value, net of transaction costs incurred. In subsequent periods, interest-bearing liabil- ities are stated at amortised cost using the effective interest method; any difference between proceeds (net of transaction costs) and the redemp- tion value is recognised in the income statement over the period of the interest-bearing liabilities. The Group has not used the option of desig- nating financial liabilities upon initial recognition as financial liabilities at fair value through profit or loss. Most non-current interest-bearing liabilities are designated as hedged items in a fair value hedge relationship. Fair value variations resulting from hedged interest rate risk are recorded to adjust the carry- ing amount of the hedged item and reported in the income statement under finance income and expenses. If hedge accounting is discontinued, the carrying amount of the hedged item is no longer adjusted for fair value changes attributable to the hedged risk and the cumulative fair value adjustment recorded during the hedge relationship is amortised based on a new effective interest recalculation through the income state- ment under finance income and expenses. Interest-bearing liabilities are classified as non-current liabilities unless they are due for settlement within 12 months of the balance sheet date. Trade payables Trade payables are obligations due to acquisition of inventories, fixed assets, goods and services in the ordinary course of business from suppli- ers. Such operating items are classified as current liabilities if they are due to be settled within the normal operating cycle of the business or within 12 months from the balance sheet date. Trade payables are recog- nised initially at fair value and subsequently at amortised cost using the effective interest method. The Group operates a mixture of pension schemes in accordance with local conditions and practices in the countries in which it operates. These programmes include defined benefit pension schemes with retirement, disability and termination benefits. Retirement benefits are usually a function of years of employment and final salary with the company. Generally, the schemes are either funded through payments to insurance companies or to trustee-administered funds as determined by periodic actuarial calculations. In addition, the Group also operates defined contribution pension arrangements. Most Finnish pension arrangements are defined contribution plans. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obliga- tion at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuar- ies using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the term of the related pension liability. The cost of providing pensions is charged to the income statement as personnel expenses so as to spread the cost over the service lives of employees. Changes in actuarial assumptions and actuarial gains and losses arising from experience adjustments are charged or credited in other comprehensive income in the period in which they arise. Past ser- vice costs and gains or losses on settlement are recognised immediately in income when they occur. For defined contribution plans, contributions are paid to pension insurance companies. Once the contributions have been paid, there are no further payment obligations. Contributions to defined contribution plans are charged to the income statement in the period to which the contributions relate. Employee benefits Pension obligations

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amor- tisation (or depreciation) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. The value in use is determined by reference to dis- counted future cash flows expected to be generated by the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets, other than goodwill, that have suffered impair- ment are reviewed for possible reversal of the impairment at each report- ing date. Where an impairment loss is subsequently reversed, the carry- ing amount of the asset is increased to the revised estimate of its recov- erable amount, but the increased carrying amount will not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. Leases Leases of property, plant and equipment where the Group, as a lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are recognised as assets and liabilities in the balance sheet at the commencement of lease term at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in other long-term interest-bearing liabilities. The interest ele- ment of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made as a les- see under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined by the method most appropriate to the particular nature of inventory, the first-in, first-out (FIFO) or weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realis- able value is the estimated selling price in the ordinary course of busi- ness, less the costs of completion and selling expenses. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts are included within current interest-bearing liabilities in the balance sheet. Treasury shares Where any Group company purchases the parent company’s shares (treasury shares), the consideration paid, including any directly attribut- able incremental costs (net of income taxes), is deducted from equity attributable to the owners of the parent company until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental

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UPM Annual Report 2014

UPM Annual Report 2014