UPM annual report 2015

UPM Annual Report 2015

contents

accounts

IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

venture accounting policies have been changed where necessary to

ensure consistency with the policies adopted by the Group. Equity

accounting is discontinued when the carrying amount of the investment

in an associated company or interest in a joint venture reaches zero,

unless the Group has incurred or guaranteed obligations in respect of

the associated company or joint venture.

Non-controlling interests

The profit or loss attributable to owners of the parent company and

non-controlling interests is presented on the face of the income state-

ment. Non-controlling interests are presented in the consolidated bal-

ance sheet within equity, separately from equity attributable to owners

of the parent company.

Transactions with non-controlling interests are treated as transac-

tions with equity owners of the Group. For purchases from non-control-

ling interests, the difference between any consideration paid and the

relevant share acquired of the carrying value of net assets of the sub-

sidiary is recorded in equity. Gains or losses of disposals to non-con-

trolling interests are also recorded in equity.

Foreign currency transactions

Items included in the financial statements of each Group subsidiary are

measured using the currency of the primary economic environment in

which the subsidiary operates (“the functional currency”). The consoli-

dated financial statements are presented in euros, which is the func-

tional and presentation currency of the parent company.

Foreign currency transactions are translated into the functional

currency using the exchange rate prevailing at the date of transaction.

Foreign exchange gains and losses resulting from the settlement of

such transactions and from the translation at year-end exchange rates

of monetary assets and liabilities denominated in foreign currencies

are recognised in the income statement, except when recognised in

other comprehensive income as qualifying cash flow hedges and quali-

fying net investment hedges.

Foreign exchange differences relating to ordinary business opera-

tions of the Group are included in the appropriate line items above

operating profit and those relating to financial items are included in a

separate line item in the income statement and as a net amount in total

finance costs.

Income and expenses for each income statement of subsidiaries

that have a functional currency different from the Group’s presentation

currency are translated into euros at quarterly average exchange rates.

Assets and liabilities of subsidiaries for each balance sheet presented

are translated at the closing rate at the date of that balance sheet. All

resulting translation differences are recognised as a separate compo-

nent in other comprehensive income. On consolidation, exchange dif-

ferences arising from the translation of net investment in foreign opera-

tions and other currency instruments designated as hedges of such

investments, are recognised in other comprehensive income. When a

foreign entity is partially disposed of, sold or liquidated, translation

differences accrued in equity are recognised in the income statement

as part of the gain or loss on sale.

Derivative financial instruments and hedging activities

Derivatives are initially recognised on the balance sheet at fair value

and thereafter remeasured at their fair value. The method of recognis-

ing the resulting gain or loss is dependent on whether the derivative is

designated as a hedging instrument, and on the nature of the item

being hedged. On the date a derivative contract is entered into, the

Group designates certain derivatives as either hedges of the fair value

of a recognised assets or liabilities or a firm commitment (fair value

hedge), hedges of a highly probable forecasted transaction or cash

flow variability in functional currency (cash flow hedge), or hedges of

net investment in a foreign operation (net investment hedge). The fair

value of derivative financial instrument is classified as a non-current

asset or liability when the remaining maturity is more than 12 months

and as a current asset or liability when the remaining maturity is less

than 12 months.

The Group applies fair value hedge accounting for hedging fixed

interest risk on interest-bearing liabilities. Changes in the fair value of

derivatives that are designated and qualify as fair value hedges and

that are highly effective both prospectively and retrospectively are

recorded in the income statement under financial items, along with any

changes in the fair value of the hedged asset or liability that are attrib-

utable to the hedged risk. The carrying amounts of hedged items and

the fair values of hedging instruments are included in interest-bearing

assets or liabilities. Derivatives that are designated and qualify as fair

value hedges mature at the same time as hedged items. If the hedge

no longer meets the criteria for hedge accounting, the adjustment to

the carrying amount of a hedged item for which the effective interest

method is used is amortised to profit or loss over the period to maturity.

The effective portion of changes in the fair value of derivatives that

are designated and qualify as cash flow hedges is recognised in other

comprehensive income. Amounts deferred in equity are transferred to

the income statement and classified as income or expense in the same

period as that in which the hedged item affects the income statement

(for example, when the forecast external sale to the Group that is

hedged takes place). The period when the hedging reserve is released

to sales after each derivative has matured is approximately one month.

The gain or loss relating to the effective portion of interest rate swaps

hedging variable rate borrowings is recognised in the income state-

ment within finance costs. When the forecast transaction that is hedged

results in the recognition of a non-financial asset (for example, fixed

assets) the gains and losses previously deferred in equity are trans-

ferred from equity and included in the initial measurement of the cost

of the asset. The deferred amounts are ultimately recognised in depre-

ciation of fixed assets.

When a hedging instrument expires or is sold, or when a hedge

no longer meets the criteria for hedge accounting, any cumulative gain

or loss existing in equity at that time remains in equity and is recog-

nised when the committed or forecast transaction is ultimately recog-

nised in the income statement. However, if a forecast transaction is no

longer expected to occur, the cumulative gain or loss that was reported

in equity is immediately transferred to the income statement.

Hedges of net investments in foreign operations are accounted for

similarly to cash flow hedges. The fair value changes of forward

exchange contracts that reflect the change in spot exchange rates are

recognised in other comprehensive income. Any gain or loss relating

to the interest portion of forward exchange contracts is recognised

immediately in the income statement under financial items. Gains and

losses accumulated in equity are included in the income statement

when the foreign operation is partially disposed of or sold.

At the inception of the transaction, the Group documents the rela-

tionship between hedging instruments and hedged items, as well as its

risk management objective and strategy for undertaking various hedge

transactions. This process includes linking all derivatives designated as

hedges to specific assets and liabilities or to specific firm commitments

or forecast transactions. The Group also documents its assessment,

both at the hedge inception and on an on-going basis, as to whether

the derivatives that are used in hedging transactions are highly effec-

tive in offsetting changes in fair values or cash flows of hedged items.

Certain derivative transactions, while providing effective hedges

under the Group Treasury Policy, do not qualify for hedge accounting.

Such derivatives are classified held for trading, and changes in the fair

value of any derivative instruments that do not qualify for hedge

accounting are recognised immediately in the income statement as

other operating income or under financial items.

Segment reporting

Operating segments are reported in a manner consistent with the

internal reporting provided to the chief operating decision maker. The

chief operating decision maker, who is responsible for allocating

resources and assessing performance of the operating segments, has

been identified as the President and CEO.

The accounting policies used in segment reporting are the same as

those used in the consolidated accounts, except for that the joint opera-

tion Madison Paper Industries (MPI) is presented as subsidiary in UPM

Paper ENA reporting. The costs and revenues as well as assets and

liabilities are allocated to segments on a consistent basis. All inter-seg-

ment sales are based on market prices, and they are eliminated on

consolidation.

Revenue recognition

Group's sales mainly comprises of sale of energy, pulp, sawn timber,

papers, self-adhesive label materials and plywood.

Sales are recognised when it is probable that future economic ben-

efits will flow to the entity, the associated costs and the amount of reve-

nue can be measured reliably, the risks and rewards of ownership

have transferred to the buyer and the Group has neither continuing

managerial involvement with the goods nor a continuing right to dis-

pose of the goods nor effective control of those goods. The timing of

revenue recognition is largely dependent on delivery terms. Group

terms of delivery are based on Incoterms 2010, the official rules for

interpretation of trade terms issued by the International Chamber of

Commerce. Revenue is recorded when the product is delivered to the

destination point for terms designated Delivered Duty Paid (“DDP”) or

Delivered at Place ("DAP"). For sales transactions designated Free on

Carrier (“FCA”), Carriage paid to (“CPT”) or Carriage and Insurance

Paid to ("CIP"), revenue is recorded at the time of shipment.

Revenues from services are recorded when the service has been

performed.

Sales are recognised net of indirect sales taxes, discounts, rebates

and exchange differences on sales under hedge accounting. The costs

of distributing products sold are included in costs and expenses.

Dividend income is recognised when the right to receive a pay-

ment is established.

Interest income is recognised by applying the effective interest rate

method.

Income taxes

The Group’s income taxes include current income taxes of Group

companies based on taxable profit for the financial period, together

with tax adjustments for previous periods and the change of deferred

income taxes.

Deferred income tax is provided in full, using the liability method,

on temporary differences arising between the tax bases of assets and

liabilities and their carrying amounts in the consolidated financial state-

ments. However, deferred income taxes are not recognised if they

arise from initial recognition of goodwill; deferred income tax is not

accounted for if it arises from initial recognition of an asset or liability

in a transaction other than a business combination that, at the time of

the transaction, does not affect either accounting or taxable profit or

loss. Deferred income tax is determined using tax rates (and laws) that

have been enacted or substantially enacted by the balance sheet date

and are expected to apply when the related deferred income tax asset

is realised or the deferred income tax liability is settled.

Deferred income tax is provided on temporary differences arising

on investments in subsidiaries, associated companies and joint ven-

tures, except where the timing of the reversal of the temporary differ-

ence is controlled by the Group and it is probable that the temporary

difference will not reverse in the foreseeable future.

Deferred income tax assets are recognised to the extent that it is

probable that there will be future taxable profits against which the tem-

porary differences can be utilised.

Special items

Certain financial performance indicators have been reported exclud-

ing special items. These indicators are non-GAAP measures applied in

the Group's financial statements to eliminate the income statement

impact of certain significant transactions which are unusual or infre-

quent in nature. The Group believes that non-GAAP measures enhance

the understanding of the historical performance. Any measures derived

with eliminating special items are not measures of financial reporting

under the IFRS, and they may not be comparable to other similarly

titled measures of other companies.

In the UPM Biorefining, UPM Paper Asia and UPM Paper ENA the

transaction (income or expense) is considered to be special item, if the

impact is one cent (EUR 0.01) after tax per share or more, and if it

arises from asset impairments, asset sales or restructuring measures, or

relate to changes in legislation or legal proceedings. In other business

areas the impact is considered to be significant if it exceeds EUR 1 mil-

lion pre-tax.

Intangible assets

Intangible assets with finite lives are carried at historical cost less

amortisation. Amortisation is based on the following estimated useful

lives:

Computer software

3–5 years

Other intangible assets

5–10 years

Goodwill and other intangible assets that are deemed to have an

indefinite life are not amortised, but are tested annually for impair-

ment.

Goodwill

Goodwill represents the excess of the consideration transferred, the

amount of any non-controlling interest in the acquiree and the acquisi-

tion date fair value of any previous equity interest in the acquiree over

the fair value of the identifiable net assets of the acquired subsidiary,

associated company or joint arrangement at the date of acquisition.

Goodwill on acquisitions of subsidiaries is included in intangible as-

sets. Goodwill on acquisitions of associated companies and joint

ventures is included in investments in associated companies and joint

ventures and is tested for impairment as part of the overall balance.

Goodwill is initially recognised as an asset at cost and is subsequently

measured at cost less any accumulated impairment losses.

Cash-generating units to which goodwill has been allocated are

tested for impairment annually, or more frequently when there is an

indication that the unit may be impaired. If the recoverable amount of

the cash-generating unit is less than the carrying amount of the unit, the

difference is an impairment loss, which is allocated first to reduce the

carrying amount of any goodwill allocated to the unit and then to other

assets of the unit. An impairment loss recognised for goodwill is not

reversed in a subsequent period.

Research and development

Research and development costs are expensed as incurred, except for

certain development costs, which are capitalised when it is probable

that a development project will generate future economic benefits, and

the cost can be measured reliably. Capitalised development costs are

amortised on a systematic basis over their expected useful lives, usual-

ly not exceeding five years.

Computer software

Costs associated with maintaining computer software programmes and

costs related to the preliminary project phase of internally developed

software are recognised as an expense as incurred. Development costs

relating to the application development phase of internally developed

software are capitalised as intangible assets. Capitalised costs include

external direct costs of material and services and an appropriate

portion of the software development teams' relevant overheads. Com-

puter software development costs recognised as assets are amortised

using the straight-line method over their useful lives.

Other intangible assets

Separately acquired patents, trademarks and licences with a finite

useful life are recognised at cost less accumulated amortisation and

impairment. Contractual customer relationships or other intangible

assets acquired in a business combination are recognised at fair value

at the acquisition date. Amortisation is calculated using the straight-line

method over their estimated useful lives. Other intangible assets that

are deemed to have an indefinite life are not amortised and are tested

annually for impairment.

Emission rights

The Group participates in government schemes aimed at reducing

greenhouse gas emissions. Emission rights received from governments

free of charge are initially recognised as intangible assets based on

market value at the date of initial recognition. Emission rights are not

amortised but are recognised at an amount not exceeding their market

value at the balance sheet date. Government grants are recognised as

deferred income in the balance sheet at the same time as emission

rights and are recognised in other operating income in the income

statement, systematically, over the compliance period to which the