UPM annual report 2014

UPM Annual Report 2014

CONTENTS

ACCOUNTS

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:

Computer software

3–5 years

Other intangible assets

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-

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:

Buildings

25–40 years

Heavy machinery

15–20 years

Light machinery and equipment 5–15 years

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

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.