UPM annual report 2015

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

Fair value estimation The different levels of fair value hierarchy used in fair value estimation have been defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). The fair values of commodity derivatives traded in active markets are based on quoted market rates and included in Level 1. Fair values of Level 2 financial instruments (e.g. over-the counter derivatives) have been estimated as follows: Interest forward rate agreements and futures contracts are fair valued based on quoted mar- ket rates on the balance sheet date; forward foreign exchange con- tracts are fair valued based on the contract forward rates in effect on the balance sheet date; foreign currency options are fair valued based on quoted market rates on the balance sheet date; interest and cur- rency swap agreements are fair valued based on discounted cash flows; and commodity derivatives are fair valued based on quoted market rates on the balance sheet date. The fair values of non-traded derivatives such as embedded derivatives are assessed by using valua- tion methods and assumptions that are based on market quotations existing at each balance sheet date. Embedded derivatives that are identified are monitored by the Group and the fair value changes are reported in other operating income in the income statement. The Group's fair valuation procedures and processes are set by the Group management. Fair valuations are performed quarterly by respective business areas or functions. Fair valuations are reviewed by the Group’s Finance & Control management and overseen by the Audit Committee. Available-for-sale investments categorised in Level 3 are disclosed in Note 22 and biological assets categorised in Level 3 in Note 20. The following table analyses financial instruments carried at fair value, by valuation method.

UPM Plywood UPM Plywood produces plywood and veneer products in Finland, Estonia and Russia. Other operations Other operations include wood sourcing and forestry, UPM Bio- composites, UPM Biochemicals business units and Group services. The information reported for each segment is the measure of what the Group’s President and CEO uses internally for evaluating segment performance and deciding on how to allocate resources to operating segments. The performance of an operating segment is evaluated primarily based on the segment’s operating profit. The joint operation Madison Paper Industries (MPI) is reported as subsidiary in UPM Paper ENA reporting. In addition, the changes in fair value of unrealised commod- ity hedges are not allocated to segments. Otherwise the segment’s operating profit is measured on a basis consistent with the consoli- dated financial statements. Sales between the segments are based on market prices. The amounts provided to the President and CEO in respect of seg- ment assets and liabilities are measured on a basis consistent with con- solidated financial statements. Assets and liabilities are allocated to the segments based on segment operations. Unallocated assets and liabili- ties comprise other than energy shares under available-for-sale invest- ments, non-current financial assets, deferred tax assets and liabilities, other non-current assets, income tax receivables and payables, cash and cash equivalents, assets classified as held for sale and related liabilities, retirement benefit obligations, provisions, interest-bearing liabilities and other liabilities and payables.

The following table presents the changes in Level 3 instruments for the year ended 31 December 2015

Available- for-sale investments

EURm

Opening balance

2,510

Additions Disposals

33

–35

Transfers into Level 3

1

Gains and losses Recognised in statement of comprehensive income, under available-for-sale investments

–424 2,085

Closing balance

The following table presents the changes in Level 3 instruments for the year ended 31 December 2014

Available- for-sale investments

EURm

Opening balance

2,661

Additions Disposals

31 –1

Transfers from Level 3 Translation differences

–10

2

Gains and losses Recognised in statement of comprehensive income, under available-for-sale investments

–173 2,510

Closing balance

4 Segment Information

The Group’s management has determined the operating segments based on management reporting regularly reviewed by the Group’s chief operating decision maker. The chief operating decision maker has been identified as the Group’s President and CEO. The operating segments are organised on a product basis. UPM’s business structure consists of the following business areas and reporting segments: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Paper Asia, UPM Paper ENA (Europe and North America) and UPM Plywood. Wood sourcing and forestry, UPM Bio- composites, UPM Biochemicals business units and Group services are reported in Other operations. Reportable segments UPM Biorefining UPM Biorefining consists of pulp, timber and biofuels businesses. UPM has three pulp mills in Finland, one pulp mill and plantation operations in Uruguay and four sawmills in Finland. UPM’s biorefinery for produc- ing wood-based renewable diesel has started up in January 2015 in Finland. UPM Energy UPM Energy operates in power generation and physical and deriva- tives trading. The segment consists of UPM’s hydro power assets in Finland and shareholdings in energy companies. UPM Raflatac UPM Raflatac manufactures self-adhesive label materials for product and information labelling. UPM Paper Asia UPM Paper Asia consists of UPM Changshu paper mill in China and label paper operations in the Tervasaari and Jämsänkoski mills in Finland. UPM Paper ENA UPM Paper ENA produces magazine paper, newsprint and fine paper in Europe and North America.

Financial assets and liabilities measured at fair value

Fair values as at 31 December 2015

Total balance

Level 1 Level 2 Level 3

EURm

Assets Trading derivatives

6 63 88 283

–

69

Derivatives used for hedging Available-for-sale investments

– 371

–

– 2,085 2,085

At 31 Dec.

94 346 2,085 2,525

Liabilities Trading derivatives

59 62 109 89 168 151

– 121 – 198 – 319

Derivatives used for hedging

At 31 Dec.

Fair values as at 31 December 2014

Total balance

Level 1 Level 2 Level 3

EURm

Assets Trading derivatives

1 61 52 328

–

62

Derivatives used for hedging Available-for-sale investments

– 380

–

– 2,510 2,510

At 31 Dec.

53 389 2,510 2,952

Liabilities Trading derivatives

22 111 81 156 103 267

– 133 – 237 – 370

Derivatives used for hedging

At 31 Dec.

There have been no transfers between levels.

contents

accounts

103

104

UPM Annual Report 2015

UPM Annual Report 2015