UPM annual report 2014

UPM Annual Report 2014

CONTENTS

ACCOUNTS

New and revised 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 liabilities.

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 contractual

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 changes in fair

value in other comprehensive income not recycling. There is a new

expected credit loss model that replaces the incurred loss impairment

model used in IAS 39. The accounting and presentation for financial

liabilities remained 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. IFRS 9 relaxes the requirements for

hedge effectiveness by replacing 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 standards

is effective for accounting periods beginning on or after 1 January 2018.

IFRS 9 standard is expected to have some impacts on accounting for

Group's financial assets. 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 control

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 Interpretations.

The standard is effective for periods beginning on or after 1 January

2017. The Group is assessing the impact of IFRS 15. The standard is not

yet endorsed by the EU.

Amendments to IAS 19 Defined benefit plans: employee contribu-

tions are effective for annual periods beginning on or after 1 July 2014.

The amendments clarify the requirements that relate to how contribu-

tions from employees or third parties that are linked to service should be

attributed to periods of service. In addition, it permits a practical expe-

dient if the amount of the contributions is independent of the number

of years of service. The amendments are not expected to have material

impacts on the Group’s financial statements.

Annual improvements to IFRSs 2010–2012 cycle, a collection of

amendments to IFRSs, in response to issues addressed during the 2010–

2012 cycle are effective for annual periods beginning on or after 1 July

2014. Seven standards are affected by the amendments. The amendments

are not expected to have material impacts on the Group’s financial state-

ments.

Annual improvements to IFRSs 2011–2013 cycle, a collection of

amendments to IFRSs, in response to issues addressed during the 2011–

2013 cycle are effective for annual periods beginning on or after 1 July

2014. Four standards are affected by the amendments. The amendments

are not expected to have material impacts on the Group’s financial state-

ments.

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 January

2016. Four standards are affected by the amendments. The amendments

are not expected to have material impacts on the Group's financial state-

ments. The amendments are not yet endorsed by the EU.

Amendment to IFRS 11 Joint arrangements is effective for annual

periods beginning on or after 1 January 2016. The amendment provides

guidance on how to account for the acquisition of an interest in a joint

operation that constitutes a business. The amendments are not yet

endorsed by the EU.

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 are not

expected to impact on the Group’s financial statements. The amend-

ments are not yet endorsed by the EU.

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 investor and

its associate or joint venture. The amendments are prospective and are

effective from 1 January 2016. The amendments are not yet endorsed by

the EU.

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 mate-

rial impacts on the Group’s financial statements. The amendments are

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 impairment.

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 dispos-

al. If the balance sheet carrying amount of the asset exceeds its recover-

able 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 products, changes in

product costs and changes in the discount rates used could lead to signif-

icant impairment charges. Details of the impairment tests are provided

in Note 16.

Biological assets

The Group owns about 1.1 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 determined based

among other estimates on growth potential, harvesting, price develop-

ment and discount rate. Changes in any estimates could lead to recogni-

tion of significant fair value changes in income statement. 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,

expected return on plan assets and changes in future compensation.

Statistical information used may differ materially from actual results due

to, among others, changing market and economic conditions, or changes

in service period of plan participants. Significant differences in actual

experience or significant changes in assumptions may affect the future

amounts of the defined benefit obligation and future expense. Retire-

ment 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 processes.

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 remediation 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 reviews 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 presented 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 schedule

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 esti-

mation 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 car-

ried out by a central treasury department, Treasury and Risk Manage-

ment (TRM). The centralisation of Treasury functions enables efficient

financial risk management, cost-efficiency and efficient cash manage-

ment.

Foreign exchange risk

The Group is exposed to foreign exchange risk arising from various

currency exposures, primarily with respect to the USD the GBP and the

JPY. Foreign exchange risk arises from future commercial transactions,

from recognised assets and liabilities and from translation exposure.

The objective of foreign exchange risk management is to limit the

uncertainty created by changes in foreign exchange rates on the future

value of cash flows and earnings as well as in the Group’s balance sheet

by hedging foreign exchange risk in forecast cash flows and balance sheet

exposures.

Transaction exposure

The Group hedges transaction exposure related to highly probable

future commercial foreign currency cash flows on a rolling basis over the

next 12-month period based on the units’ forecasts. According to the

Group’s Treasury Policy 50% hedging is considered risk neutral. Some

highly probable cash flows have been hedged for longer than 12 months

ahead while deviating from the risk neutral hedging level at the same

time. Forward contracts are used in transaction exposure management.

Most of the derivatives entered into to hedge foreign currency cash flows

meet the hedge accounting requirements. At 31 December 2014, 47%

(46%) of the forecast 12-month currency flow was hedged.

The table below shows the nominal values of all cash flow hedging

instruments at 31 December 2014 and 2013

Nominal values of hedging instruments

Currency

2014

EURm

2013

EURm

USD

439

462

GBP

288

196

JPY

134

142

AUD

Others

Total

907

851

External forwards are designated at group level as hedges of foreign

exchange risk of specific future foreign currency sales on gross basis.

The Group has several currency denominated assets and liabilities in

its balance sheet such as foreign currency loans and deposits, accounts

payable and receivable and cash in other currencies than functional cur-

rency. The aim is to hedge this balance sheet exposure fully using finan-

cial instruments. The Group might, however, within the limits set in the

Group Treasury Policy have unhedged balance sheet exposures. At 31

December 2014 unhedged balance sheet exposures in interest-bearing

assets and liabilities amounted to EUR 18 million (7 million). In addi-

tion the Group has non-interest-bearing accounts receivable and payable

balances denominated in foreign currencies. The nominal values of the

hedging instruments used in accounts payable and receivable hedging

were EUR 575 million (675 million).

Translation exposure

The Group has net investments in foreign subsidiaries that are subject to

foreign currency translation differences. The exchange risks associated

with net investments in foreign subsidiaries are hedged in Canada and

Uruguay. The net investments of all other foreign operations are not

hedged.

Foreign exchange risk sensitivity

At 31 December 2014, if Euro had weakened/strengthened by 10%

against the USD with all other variables held constant, pre-tax profit for

the year would have been EUR 11 million (8 million) lower/higher due to

balance sheet foreign exchange exposure. The effect in equity would have

been EUR 36 million (42 million) lower/higher, arising mainly from

foreign currency forwards used to hedge forecasted foreign currency

flows.

As of 31 December 2014, if Euro had weakened/strengthened by

10% against the GBP with all other variables held constant, pre-tax

profit for the year would have been EUR 0 million (0 million) higher/

lower due to balance sheet foreign exchange exposure. The effect in

equity would have been EUR 29 million (20 million) lower/higher, aris-

ing mainly from foreign currency forwards used to hedge forecasted for-

eign currency flows.

As of 31 December 2014, if Euro had weakened/strengthened by

10% against the JPY with all other variables held constant, pre-tax profit

for the year would have been EUR 2 million (1 million) higher/lower.