UPM annual report 2015

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

Earnings per share The basic earnings per share are computed using the weighted aver- age number of shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares outstanding during the period plus the dilutive effect of share options. Adoption of new International Financial Reporting Standards, interpretations and amendments to existing standards New standards, interpretations and amendments to existing standards effective in 2015 Annual improvements to IFRSs 2010–2012 cycle and 2011–2013 cycle. The adoption of improvements did not have any impact on the the Group’s financial statements. Amendments to IAS 19 Defined benefit plans: employee contribu- tions. The amendments clarify the accounting for defined benefit plans that require employees or third parties to contribute towards the cost of the benefits. The amendments did not have any impact on the Group’s financial statements. New standards, interpretations and amendments to existing standards that are not yet effective and have not yet been early adopted by the Group IFRS 9 Financial Instruments includes requirements for classification, measurement and recognition of financial assets and financial liabili- ties. The complete version of IFRS 9 was issued in July 2014 and it replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit or loss. The basis of classification depends on the entity’s business model and the con- tractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present chang- es in fair value in other comprehensive income without recycling. The Group does not expect material impact from the new classification and measurement rules on the Group’s financial statements. There is a new expected credit loss model in IFRS 9 that replaces the incurred loss impairment model used in IAS 39. The new model will most likely not cause a major increase in credit loss allowances. The accounting and presentation for financial liabilities remained under IFRS 9 the same except for the recognition of changes in own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss. Currently the Group does not have any financial liabilities that are designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replac- ing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. The Group is currently assessing impact of its hedging arrangements on the financial statements. IFRS 9 is effective for accounting periods beginning on or after 1 January 2018. The standard is not yet endorsed by the EU. IFRS 15 Revenues from contracts with customers deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains con- trol of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related Inter- pretations. Based on assessment made, the Group does not expect significant changes in the measurement of revenue and timing of rec- ognition. IFRS 15 is effective for periods beginning on or after 1 Janu- ary 2018. The standard is not yet endorsed by the EU. Annual Improvements to IFRSs 2012–2014 cycle, a collection of amendments to IFRSs, in response to issues raised during the 2012- 2014 cycle are effective for annual periods beginning on or after 1

are recognised as equity-settled or cash-settled share-based payment transactions depending on the settlement. Under the Performance Share Plans the UPM shares are awarded based on the Group’s financial performance or total shareholder return during a three-year earning period and under the Deferred Bonus Plans share incentives are based on achievement of Group and /or business area EBITDA 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 purchase shares from the market. Provisions Provisions are recognised when the Group has a present legal or constructive 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 reliable estimate of the amount can be made. Where the Group ex- pects 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 communicat- ed 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 reasonably 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. 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 con- sidered highly probable. Non-current assets classified as held for sale, or included 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 repre- sents a separate major line of business or geographical area of opera- tions, or is a part of a single co-ordinated plan to dispose of a sepa- rate 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 recog- nised as a liability in the Group’s consolidated financial statements in the period in which the dividends are approved by the parent compa- ny’s shareholders.

and economic conditions, or changes in service period of plan partici- pants. Significant differences in actual experience or significant chang- es in assumptions may affect the future amounts of the defined benefit obligation and future expense. Retirement benefit obligations are disclosed in Note 29. Environmental provisions Operations of the Group are based on heavy process industry which requires large production facilities. In addition to basic raw materials, considerable amount of chemicals, water and energy is used in pro- cesses. The Group’s operations are subject to several environmental laws and regulations. The Group aims to operate in compliance with regulations related to the treatment of waste water, air emissions and landfill sites. The Group has provisions for normal environmental reme- diation costs. Unexpected events occurred during production processes and waste treatment could cause material losses and additional costs in the Group’s operations. Provisions are disclosed in Note 30. Income taxes Management judgement is required for the calculation of provision for income taxes and deferred tax assets and liabilities. The Group re- views at each balance sheet date the carrying amount of deferred tax assets. The Group considers whether it is probable that the subsidiaries will have sufficient taxable profits against which the unused tax losses or unused tax credits can be utilised. The factors used in estimates may differ from actual outcome which could lead to significant adjustment to deferred tax assets recognised in the income statement. Income taxes are disclosed in Note 13 and deferred income taxes in Note 28. Legal contingencies Management judgement is required in measurement and recognition of provisions related to pending litigation. Provisions are recorded when the Group has a present legal or constructive obligation as a result of past event, an unfavourable outcome is probable and the amount of loss can be reasonably estimated. Due to inherent uncertain nature of litigation, the actual losses may differ significantly from the originally estimated provision. Details of legal contingencies are pre- sented in Note 39. Available-for-sale investments Group's available-for-sale investments include investments in unlisted equity shares that are measured at fair value in the balance sheet. The fair valuation requires management's assumptions and estimates of number of factors (e.g. discount rates, electricity price, start-up sched- ule of Olkiluoto 3 nuclear power plant), that may differ from the actual outcome which could lead to significant adjustment to the carrying amount of the available-for-sale investment and equity. Fair value estimation of financial assets is disclosed in Note 3 and available-for- sale investments in Note 22. 3 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and interest rate risk), credit risk and liquidity risk. The objective of financial risk management is to protect the Group from unfavourable changes in financial markets and thus help to secure profitability. The objectives and limits for financing activities are defined in the Group Treasury Policy approved by the company’s Board of Directors. In financial risk management various financial instruments are used within the limits specified in the Group Treasury Policy. Only such instruments whose market value and risk profile can be continuously and reliably monitored are used for this purpose. Financial services are provided and financial risk management carried out by a central treasury department, Treasury and Risk Management (TRM). The centralisation of Treasury functions enables efficient financial risk management, cost-efficiency and efficient cash management.

January 2016. Four standards are affected by the amendments. The amendments are not expected to have material impacts on the Group’s financial statements. Amendment to IFRS 11 Joint arrangements is effective for annual periods beginning on or after 1 January 2016. The amendment pro- vides guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. Amendment to IAS 16 Property, plant and equipment and IAS 38 Intangible assets regarding depreciation and amortisation are effective for annual periods beginning on or after 1 January 2016. The amend- ment clarifies that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate. The amendments have no impact on the Group’s financial statements. Amendment to IFRS 10 and IAS 28 address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an inves- tor and its associate or joint venture. The amendments are prospective and are effective from 1 January 2016. Amendment to IAS 1 Presentation of financial statements is part of IASB major initiative to improve presentation and disclosures in finan- cial reports. The amendment is effective for annual periods beginning on or after 1 January 2016. The amendments are not expected to have material impacts on the Group’s financial statements. IFRS 16 Leases standard has been issued in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presenta- tion and disclosure of leases for both parties to a contract. IFRS 16 is effective from 1 January 2019 and will most likely to have an impact on Group’s financial statements. The standard is not yet endorsed by the EU. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have an impact on the Group. 2 Critical judgements in applying accounting policies and key sources of estimation uncertainty Impairment of non-current assets Goodwill, intangible assets not yet available for use and intangible assets with indefinite useful lives are tested at least annually for impair- ment. Other long-lived assets are reviewed when there is an indication that impairment may have occurred. Estimates are made of the future cash flows expected to result from the use of the asset and its eventual disposal. If the balance sheet carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognised. Actual cash flows could vary from estimated discounted future cash flows. The long useful lives of assets, changes in estimated future sales prices of prod- ucts, changes in product costs and changes in the discount rates used could lead to significant impairment charges. Details of the impairment tests are provided in Note 16. Biological assets The Group owns about 1.0 million hectares of forest land and planta- tions. Biological assets (i.e. living trees) are measured at their fair value at each balance sheet date. The fair value of biological assets other than young seedling stands is based on discounted cash flows from continuous operations. The fair value of biological assets is deter- mined based among other estimates on growth potential, harvesting, price development and discount rate. Changes in any estimates could lead to recognition of significant fair value changes in income state- ment. Biological assets are disclosed in Note 20. Employee benefits The Group operates a mixture of pension and other post-employment benefit schemes. Several statistical and other actuarial assumptions are used in calculating the expense and liability related to the plans. These factors include, among others, assumptions about the discount rate and changes in future compensation. Statistical information used may differ materially from actual results due to, among others, changing market

UPM Annual Report 2015 99 contents

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UPM Annual Report 2015 100