UPM annual report 2015

UPM Annual Report 2015

contents

accounts

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

corresponding emission rights relate. The emissions realised are ex-

pensed under other operating costs and expenses in the income state-

ment and presented as a provision in the balance sheet. Emission

rights and associated provisions are derecognised 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 impairment 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,

depreciation periods are changed prospectively.

Subsequent costs are included in the asset’s carrying amount or

recognised as a separate asset, as appropriate, only when it is proba-

ble 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 maintenance 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

disposal proceeds with the carrying amount and are included in oper-

ating 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

selling 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 deduct-

ed 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.

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 continu-

ous operations. The fair value of young seedling stands is the actual

reforestation cost of those stands. Continuous operations, the mainte-

nance 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, envi-

ronmental restrictions 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 devel-

opment.

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:

financial assets at fair value through profit or loss, loans and receiv-

ables 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

ownership.

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 rec-

ognised 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 without fixed maturity date are measured at

amortised cost. Loan receivables are impaired if the carrying amount

is greater than the estimated recoverable amount.

Trade receivables are non-derivatives that are recognised initially

at fair value and subsequently measured at amortised cost, less provi-

sion for impairment. Provision for impairment is charged to the income

statement 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 pay-

ments 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.

Investments 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

comprehensive 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 sub-

sequently reversed through the income statement.

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

amortisation (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 discounted 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

impairment are reviewed for possible reversal of the impairment at

each reporting date. Where an impairment loss is subsequently

reversed, the carrying amount of the asset is increased to the revised

estimate of its recoverable 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 liabili-

ties 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

element 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 lessee 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 borrow-

ing costs. Net realisable value is the estimated selling price in the

ordinary course of business, 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 attrib-

utable 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

liabilities are stated at amortised cost using the effective interest meth-

od; any difference between proceeds (net of transaction costs) and the

redemption value is recognised in the income statement over the peri-

od of the interest-bearing liabilities. The Group has not used the option

of designating 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 car-

rying amount of the hedged item and reported in the income statement

under finance income and expenses. If hedge accounting is discontin-

ued, 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 amor-

tised based on a new effective interest recalculation through the

income statement 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

suppliers. 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 pay-

ables are recognised initially at fair value and subsequently at amor-

tised 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 actu-

aries 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 service 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 contribu-

tion 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 usual-

ly 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 inde-

pendent qualified actuaries.

Share-based compensation

The Group’s long term incentive plans are long-term share incentive

plans, the Performance Share Plan for senior executives and the De-

ferred Bonus Plan for other key employees. These compensation plans