UPM annual report 2015

UPM Annual Report 2015

100

UPM Annual Report 2015

contents

accounts

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

are recognised as equity-settled or cash-settled share-based payment

transactions depending on the settlement.

Under the Performance Share Plans the UPM shares are awarded

based on the Group’s financial performance or total shareholder return

during a three-year earning period and under the Deferred Bonus

Plans share incentives are based on achievement of Group and /or

business area EBITDA 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 purchase

shares from the market.

Provisions

Provisions are recognised when the Group has a present legal or

constructive 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

reliable estimate of the amount can be made. Where the Group ex-

pects 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 communicat-

ed 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

reasonably 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 con-

sidered highly probable. Non-current assets classified as held for sale,

or included 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 repre-

sents a separate major line of business or geographical area of opera-

tions, or is a part of a single co-ordinated plan to dispose of a sepa-

rate 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 recog-

nised as a liability in the Group’s consolidated financial statements in

the period in which the dividends are approved by the parent compa-

ny’s shareholders.

Earnings per share

The basic earnings per share are computed using the weighted aver-

age number of shares outstanding during the period. Diluted earnings

per share are computed using the weighted average number of shares

outstanding during the period plus the dilutive effect of share options.

Adoption of new International Financial Reporting

Standards, interpretations and amendments to existing

standards

New standards, interpretations and amendments to existing

standards effective in 2015

Annual improvements to IFRSs 2010–2012 cycle and 2011–2013

cycle. The adoption of improvements did not have any impact on the

the Group’s financial statements.

Amendments to IAS 19 Defined benefit plans: employee contribu-

tions. The amendments clarify the accounting for defined benefit plans

that require employees or third parties to contribute towards the cost of

the benefits. The amendments did not have any impact on the Group’s

financial statements.

New 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 liabili-

ties. 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 con-

tractual 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 chang-

es in fair value in other comprehensive income without recycling. The

Group does not expect material impact from the new classification and

measurement rules on the Group’s financial statements.

There is a new expected credit loss model in IFRS 9 that replaces

the incurred loss impairment model used in IAS 39. The new model

will most likely not cause a major increase in credit loss allowances.

The accounting and presentation for financial liabilities remained

under IFRS 9 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. Currently the Group does not have any

financial liabilities that are designated at fair value through profit or

loss.

IFRS 9 relaxes the requirements for hedge effectiveness by replac-

ing 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 Group is currently assessing impact

of its hedging arrangements on the financial statements.

IFRS 9 is effective for accounting periods beginning on or after 1

January 2018. 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 con-

trol 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 Inter-

pretations. Based on assessment made, the Group does not expect

significant changes in the measurement of revenue and timing of rec-

ognition. IFRS 15 is effective for periods beginning on or after 1 Janu-

ary 2018. The standard is not yet endorsed by the EU.

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 statements.

Amendment to IFRS 11

Joint arrangements is effective for annual

periods beginning on or after 1 January 2016. The amendment pro-

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

joint operation that constitutes a business.

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 have no

impact on the Group’s financial statements.

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 inves-

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

and are effective from 1 January 2016.

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 material impacts on the Group’s financial statements.

IFRS 16

Leases standard has been issued in January 2016. IFRS

16 sets out the principles for the recognition, measurement, presenta-

tion and disclosure of leases for both parties to a contract. IFRS 16 is

effective from 1 January 2019 and will most likely to have an impact

on Group’s financial statements. The standard is 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 impair-

ment. 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

disposal. If the balance sheet carrying amount of the asset exceeds its

recoverable 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 prod-

ucts, changes in product costs and changes in the discount rates used

could lead to significant impairment charges. Details of the impairment

tests are provided in Note 16.

Biological assets

The Group owns about 1.0 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 deter-

mined based among other estimates on growth potential, harvesting,

price development and discount rate. Changes in any estimates could

lead to recognition of significant fair value changes in income state-

ment. 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 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 partici-

pants. Significant differences in actual experience or significant chang-

es in assumptions may affect the future amounts of the defined benefit

obligation and future expense. Retirement 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 pro-

cesses. 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 reme-

diation 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 re-

views 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 pre-

sented 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 sched-

ule 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

estimation 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

carried out by a central treasury department, Treasury and Risk

Management (TRM). The centralisation of Treasury functions enables

efficient financial risk management, cost-efficiency and efficient cash

management.