UPM annual report 2014

UPM Annual Report 2014

CONTENTS

ACCOUNTS

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

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.

Employee benefits

Pension obligations

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.

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.

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.