UPM annual report 2015

UPM Annual Report 2015

103

104

contents

accounts

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

Fair value estimation

The different levels of fair value hierarchy used in fair value estimation

have been defined as follows:

Level 1: quoted prices (unadjusted) in active markets for identical

assets or liabilities.

Level 2: inputs other than quoted prices included within level 1 that

are observable for the asset or liability, either directly (that is, as

prices) or indirectly (that is, derived from prices).

Level 3: inputs for the asset or liability that are not based on

observable market data (that is, unobservable inputs).

The fair values of commodity derivatives traded in active markets

are based on quoted market rates and included in Level 1.

Fair values of Level 2 financial instruments (e.g. over-the counter

derivatives) have been estimated as follows: Interest forward rate

agreements and futures contracts are fair valued based on quoted mar-

ket rates on the balance sheet date; forward foreign exchange con-

tracts are fair valued based on the contract forward rates in effect on

the balance sheet date; foreign currency options are fair valued based

on quoted market rates on the balance sheet date; interest and cur-

rency swap agreements are fair valued based on discounted cash

flows; and commodity derivatives are fair valued based on quoted

market rates on the balance sheet date. The fair values of non-traded

derivatives such as embedded derivatives are assessed by using valua-

tion methods and assumptions that are based on market quotations

existing at each balance sheet date. Embedded derivatives that are

identified are monitored by the Group and the fair value changes are

reported in other operating income in the income statement.

The Group's fair valuation procedures and processes are set by

the Group management. Fair valuations are performed quarterly by

respective business areas or functions. Fair valuations are reviewed by

the Group’s Finance & Control management and overseen by the Audit

Committee.

Available-for-sale investments categorised in Level 3 are disclosed

in Note 22 and biological assets categorised in Level 3 in Note 20.

The following table analyses financial instruments carried at fair

value, by valuation method.

Financial assets and liabilities measured at fair value

Fair values as at 31 December 2015

EURm

Level 1 Level 2 Level 3

Total

balance

Assets

Trading derivatives

6 63

–

Derivatives used for hedging

88 283

– 371

Available-for-sale investments

–

– 2,085 2,085

At 31 Dec.

94 346 2,085 2,525

Liabilities

Trading derivatives

59 62

– 121

Derivatives used for hedging

109 89

– 198

At 31 Dec.

168 151

– 319

Fair values as at 31 December 2014

EURm

Level 1 Level 2 Level 3

Total

balance

Assets

Trading derivatives

1 61

–

Derivatives used for hedging

52 328

– 380

Available-for-sale investments

–

– 2,510 2,510

At 31 Dec.

53 389 2,510 2,952

Liabilities

Trading derivatives

22 111

– 133

Derivatives used for hedging

81 156

– 237

At 31 Dec.

103 267

– 370

There have been no transfers between levels.

The following table presents the changes in Level 3 instruments

for the year ended 31 December 2015

EURm

Available-

for-sale

investments

Opening balance

2,510

Additions

Disposals

–35

Transfers into Level 3

Gains and losses

Recognised in statement of comprehensive income,

under available-for-sale investments

–424

Closing balance

2,085

The following table presents the changes in Level 3 instruments

for the year ended 31 December 2014

EURm

Available-

for-sale

investments

Opening balance

2,661

Additions

Disposals

–1

Transfers from Level 3

–10

Translation differences

Gains and losses

Recognised in statement of comprehensive income,

under available-for-sale investments

–173

Closing balance

2,510

4 Segment Information

The Group’s management has determined the operating segments

based on management reporting regularly reviewed by the Group’s

chief operating decision maker. The chief operating decision maker

has been identified as the Group’s President and CEO.

The operating segments are organised on a product basis.

UPM’s business structure consists of the following business areas

and reporting segments: UPM Biorefining, UPM Energy,

UPM Raflatac, UPM Paper Asia, UPM Paper ENA (Europe and North

America) and UPM Plywood. Wood sourcing and forestry, UPM Bio-

composites, UPM Biochemicals business units and Group services are

reported in Other operations.

Reportable segments

UPM Biorefining

UPM Biorefining consists of pulp, timber and biofuels businesses. UPM

has three pulp mills in Finland, one pulp mill and plantation operations

in Uruguay and four sawmills in Finland. UPM’s biorefinery for produc-

ing wood-based renewable diesel has started up in January 2015 in

Finland.

UPM Energy

UPM Energy operates in power generation and physical and deriva-

tives trading. The segment consists of UPM’s hydro power assets in

Finland and shareholdings in energy companies.

UPM Raflatac

UPM Raflatac manufactures self-adhesive label materials for product

and information labelling.

UPM Paper Asia

UPM Paper Asia consists of UPM Changshu paper mill in China and

label paper operations in the Tervasaari and Jämsänkoski mills in

Finland.

UPM Paper ENA

UPM Paper ENA produces magazine paper, newsprint and fine paper

in Europe and North America.

UPM Plywood

UPM Plywood produces plywood and veneer products in Finland,

Estonia and Russia.

Other operations

Other operations include wood sourcing and forestry, UPM Bio-

composites, UPM Biochemicals business units and Group services.

The information reported for each segment is the measure of what the

Group’s President and CEO uses internally for evaluating segment

performance and deciding on how to allocate resources to operating

segments.

The performance of an operating segment is evaluated primarily

based on the segment’s operating profit. The joint operation Madison

Paper Industries (MPI) is reported as subsidiary in UPM Paper ENA

reporting. In addition, the changes in fair value of unrealised commod-

ity hedges are not allocated to segments. Otherwise the segment’s

operating profit is measured on a basis consistent with the consoli-

dated financial statements. Sales between the segments are based on

market prices.

The amounts provided to the President and CEO in respect of seg-

ment assets and liabilities are measured on a basis consistent with con-

solidated financial statements. Assets and liabilities are allocated to the

segments based on segment operations. Unallocated assets and liabili-

ties comprise other than energy shares under available-for-sale invest-

ments, non-current financial assets, deferred tax assets and liabilities,

other non-current assets, income tax receivables and payables, cash

and cash equivalents, assets classified as held for sale and related

liabilities, retirement benefit obligations, provisions, interest-bearing

liabilities and other liabilities and payables.