UPM Annual Report 2016

ACCOUNTS

UPM Annual Report 2016

108

109

In brief

Strategy

Businesses

Stakeholders

Governance

Accounts

CONTENTS

Financial risks

UPM is exposed to a variety of financial risks as a result of its business

activities including currency risk, interest rate risk, commodity price

risk, credit risk, capital risk and liquidity risk. Risk management related

to financial activities is carried out by UPM’s central treasury

department, Treasury and Risk Management, under policies approved

by the Board of Directors. Financial risks are described in the relevant

notes as described below.

Basis for reporting

1.1 Corporate information

UPM-Kymmene Corporation (“the parent company” or “the

company”) together with its consolidated subsidiaries (“UPM” or

“thegroup”) is a global forest industry group. UPM large product

range covers pulp, graphic and specialty papers, self-adhesive labels,

wood-based renewable diesel, electricity as well as plywood and

timber products.

UPM-Kymmene Corporation is a Finnish limited liability company,

domiciled in Helsinki in the Republic of Finland. The address of the

company’s registered office is Alvar Aallon katu 1, 00100 Helsinki,

where a copy of the consolidated financial statements can be

obtained.

The parent company’s shares are publicly traded on the Nasdaq

Helsinki Main Market.

These group consolidated financial statements were authorised

for issue by the Board of Directors on 31 January 2017. According

to the Finnish Companies Act, the General Meeting of Shareholders

is entitled to decide on the adoption of the company’s financial

statements.

1.2 Basis of preparation

UPM’s consolidated financial statements are prepared in accordance

with International Financial Reporting Standards as adopted by the

European Union (IFRS as adopted by the EU) and IFRIC

Interpretations.

The consolidated financial statements have been prepared under

the historical cost convention, except for forest assets, energy

shareholdings and certain other financial assets and financial

liabilities, defined benefit plan assets and obligations and share-

based payment arrangements which are measured at fair value.

FINANCIAL RISK

NOTE

Credit risk

4.6 Working capital

Liquidity and refinancing risk

5.1 Capital management

Interest rate risk

6.1 Financial risk management

Foreign exchange risk

6.1 Financial risk management

Electricity price risk

6.1 Financial risk management

Financial counterparty risk

6.2 Derivatives and hedge accounting

The consolidated financial statements are presented in millions of

euros, which is the functional and presentation currency of the parent

company. 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 amounts within parentheses refer to the preceding year, 2015.

Figures presented in these financial statements are rounded and

therefore the sum of individual figures might deviate from the

presented total figure.

Accounting policies

The accounting policies applied to the consolidated financial

statements as a whole are described in this section, while the

remaining accounting policies are described in the notes to which

they relate as UPM aims to provide enhanced understanding of each

financial statement area. Further, to provide a better understanding,

the accounting choices made within the framework of the prevailing

IFRS are described together with the policy.

Key estimates and judgements

In the process of applying the group’s accounting policies,

management has made a number of judgements and applied

estimates of future events that affect the reported amounts of assets

and liabilities, the disclosure of contingent assets and liabilities at

the date of the financial statements, and the reported amounts of

revenues and expenses during the reporting periods. Although these

estimates are based on management’s best knowledge, actual results

and timing may ultimately differ from previously made estimates.

Key estimates and judgement which are material to the reported

results and financial position are presented in the following notes:

KEY ESTIMATES AND JUDGEMENTS

NOTE

Valuation of forest assets

4.2 Forest assets

Fair value determination of energy shareholdings

4.3 Energy shareholdings

Impairment of property, plant and equipment

4.1 Property, plant and equipment

Impairment of goodwill and other intangible assets

4.4 Goodwill and other intangible assets

Pension and other post-employment benefits

3.4 Retirement benefit obligations

Income taxes

7. Income tax

Environmental provisions

4.5 Provisions

Legal contingencies

9.2 Litigation

1.3 Consolidation principles

Subsidiaries

UPM’s consolidated financial statements include the financial

statements of the parent company, UPM-Kymmene Corporation, and

subsidiaries controlled by UPM. All group entities apply consistently

UPM’s accounting policies. All intercompany transactions, receivables,

liabilities and unrealised profits, as well as intragroup profit

distributions, are eliminated. Unrealised losses are also eliminated

unless the transaction provides evidence of an impairment of the

transferred asset.

Joint operations

UPM’s share in joint operations is recognised in the consolidated

balance sheet through recognition of the group’s own assets and

liabilities and revenues and expenses in the arrangement together

with UPM’s proportionate share in the joint assets, liabilities and joint

income and expenses. The proportionate share of realised and

unrealised gains and losses arising from intragroup transactions

between UPM and its joint operations is eliminated.

Associates and joint ventures

Associates are entities over which the group has significant influence.

Joint ventures are joint arrangements where the group has joint control

with other parties and the parties have rights to the arrangement’s net

assets.

Interests in associates and joint ventures are accounted for using

the equity method of accounting and are initially recognised at cost.

Associates and joint ventures follow the group accounting policies

for consolidation purpose.

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

statement. Non-controlling interests are presented in the consolidated

balance sheet within equity, separately from equity attributable to

owners of the parent company.

Transactions with non-controlling interests are treated as

transactions with equity owners of the group. For purchases from

non-controlling interests, the difference between consideration paid

and the acquired share of the carrying value of the subsidiary’s net

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

controlling interests are also recorded in equity, net of transaction

costs.

1.4 Foreign currency translation

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

qualifying net investment hedges.

UPM records foreign exchange differences relating to ordinary

business operations within the appropriate line items above operating

profit and those relating to financial items are presented separately

as a net amount in finance costs.

Income and expenses of subsidiaries that have a functional

currency different from euro are translated into euros at quarterly

average exchange rates. Assets and liabilities of subsidiaries are

translated at the closing rate at the balance sheet date. All resulting

translation differences are recognised as a separate component in

other comprehensive income. On consolidation, exchange differences

arising from the translation of net investment in foreign operations 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/liquidation.

Items marked with this symbol

describe the accounting

principle applied by UPM to

the specific financial

statement area

Items marked with this symbol

indicate that the accounting

area involves estimates and

judgement which are

described separately.

Risks related disclosures,

whether they are financial,

actuarial, credit or

counterparty in nature, can

be found in sections marked

with this symbol.

Notes to the consolidated financial statements

The notes to the consolidated financial statements are grouped into sections based on their nature. The notes contain

the relevant financial information as well as a description of accounting policy and key estimates and judgements

applied for the topics of the individual notes. All amounts are shown in millions of euros unless otherwise stated.