UPM Annual Report 2016

122-123 / 176

ACCOUNTS
UPM Annual Report 2016 UPM Annual Report 2016 122 123
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CONTENTS
Accounting policies
Defined benefit pension plans
Plan benefits depend on salary and length of service. The defined
benefit obligations are calculated annually by independent actuaries
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 liability recognised in the balance sheet
in respect of defined benefit pension plans is the present value of the
defined benefit obligation at the balance sheet date less the fair value
of plan assets. The cost of providing pensions is charged to the
income statement as employee costs 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.
4. Capital employed
UPM’s capital employed primarily relates to its production facilities
and both forest and energy assets. UPM aims to capture growth
opportunities in its existing business portfolio and invest in projects
with attractive and sustainable returns. In 2016, growth investments
contributed significantly to UPM’s earnings.
EURm 2016 2015
Property, plant and equipment 4,657 4,895
Forest assets 1,734 1,738
Energy shareholdings 1,932 2,085
Goodwill and other intangible assets 545 570
Operating working capital 1,694 1,875
Provisions –145 –154
Net retirement benefit assets and liabilities –746 –654
Cash and cash equivalents 992 626
Other assets and liabilities –3 19
Net deferred tax assets and liabilities –11 10
Assets classified as held for sale 8 –
Total 10,657 11,010
EURm
LAND AND
WATER
AREAS BUILDINGS
MACHINERY
AND
EQUIPMENT
OTHER
TANGIBLE
ASSETS
CONSTRUCTION
IN PROGRESS TOTAL
2016
Accumulated costs 836 3,638 14,326 881 89 19,770
Accumulated depreciation and impairments –34 –2,506 –11,824 –748 – –15,113
Carrying value, at 31 December 801 1,131 2,502 133 89 4,657
Carrying value, at 1 January 724 1,213 2,744 134 80 4,895
Additions 76 4 13 4 222 319
Disposals –17 –11 –8 –1 – –36
Depreciations – –84 –377 –18 – –478
Impairment – –12 –21 1 – –32
Reclassifications 4 24 168 13 –214 –4
Translation differences 14 –4 –17 – – –6
Carrying value, at 31 December 801 1,131 2,502 133 89 4,657
2015
Accumulated costs 758 3,737 14,740 902 80 20,217
Accumulated depreciation and impairments –34 –2,524 –11,996 –768 − –15,322
Carrying value, at 31 December 724 1,213 2,744 134 80 4,895
Carrying value, at 1 January 674 1,133 2,420 114 366 4,707
Additions 9 36 150 7 269 471
Disposals –12 –1 –1 − − –14
Depreciations − –82 –388 –17 − –487
Reclassifications 7 87 471 26 –563 28
Translation differences 46 40 92 4 8 190
Carrying value, at 31 December 724 1,213 2,744 134 80 4,895
Defined contribution plans
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
contribution 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
usually 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 independent qualified actuaries.
Capital employed
4.1 Property, plant and equipment
Capitalised borrowing costs
In 2016, the borrowing costs capitalised as part of non-current assets
amounted to EUR 1 million (8 million). Amortisation of capitalised
borrowing costs was EUR 4 million (4 million) and the average interest
rate used 1.56% (4.99%), which represents the average costs to
finance the projects.
Capital expenditure
Capital expenditure, excluding acquisitions and shares, amounted
to EUR 325 million (486 million) in 2016.
In 2016, UPM’s major capital expenditures related to growth
investments. The expansion of the Otepää plywood mill in Estonia
and modernising UPM Kaukas pulp mill in Finland were finalised in
2016. In July 2016, UPM announced it will invest EUR 98 million in
UPM Kymi pulp mill in Finland to further strengthen its position as
a supplier of bleached chemical pulp for growing consumer and
industrial end-use segments. Completion of the investment is
scheduled for the end of 2017. In October 2016, UPM announced a
EUR 35 million investment in UPM Raflatac factory in Poland to meet
the increasing label stock demand in Europe. Completion of the
investment is scheduled for first half of 2018.
In 2015 UPM’s capital expenditures related to Otepää plywood
mill in Estonia, Kaukas and Kymi pulp mills in Finland, share issue from
Pohjolan Voima Oy to finance the Olkiluoto 3 nuclear power plant
project, increasing of labelstock coating capacity in the Asia-Pacific
region, production capacity for film labelstock business in Poland and
new paper machine at Changshu mill in China.
EURm 2016 2015
Capacity increase / Kymi pulp mill 80 –
Capacity increase / Raflatac Poland 33 –
Debottlenecking / Kaukas pulp mill – 49
Mill expansion / Otepää – 30
Impairment losses
In March 2016, UPM announced the closure of Madison Paper
Industries paper mill in the US. Madison Paper Industries is a joint
operation between UPM-Kymmene Inc. and Northern SC Paper
Corp., a subsidiary of the New York Times Company. With the
closure of the mill, UPM recognised impairment charges of EUR 9
million (EUR 20 million in UPM Paper ENA business area and the
corresponding adjustment of EUR 11 million in eliminations and
reconciliations) on property, plant and equipment. Hydropower assets
located at the mill site have been classified as assets held for sale.
» Refer Note 8.4 Assets held for sale, for further information.
In November 2016, UPM announced the plan to close of SC paper
machine 3 at UPM Steyrermühl mill in Austria and SC paper machine
2 at UPM Augsburg mill in Germany. The impairment charges
recognised amounted to EUR 23 million and EUR 1 million,
respectively, and affected UPM Paper ENA business area. The
demand for SC papers, in line with other graphic papers, has been
declining during the last years and the decline is expected to
continue.
In 2015, there were no impairment charges for property, plant
and equipment assets.
Major capital commitments at 31 December
ASSESSED USEFUL LIVES NUMBER OF YEARS
Land, not subject to depreciation –
Buildings 20–50
Power plants 20–30
Heavy machinery 15–20
Light machinery 10–15
Equipment 5
Impairment testing
Carrying values of individual items included in property, plant and
equipment are reviewed at each closing date to determine whether
there is any indication of impairment. The carrying value is written
down immediately to the asset’s recoverable amount if the carrying
value exceeds the estimated recoverable amount. Assets that have
an indefinite useful life are not subject to amortisation and are tested
annually for impairment. The recoverable amount is determined as
the higher of an asset’s fair value less costs to sell and its value in use.
Value in use is determined by discounting 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.
Key estimates and judgements
The estimations of useful lives, residual value as well as depreciation
and amortisation methods require significant management judgement
and are reviewed annually. Management makes estimates on the
future cash flows expected to result from the use of the asset and its
eventual disposal. While management believes that estimates of future
cash flows are reasonable, different assumptions regarding such cash
flows could materially affect valuations.
The long useful lives of assets, changes in estimated future sales
prices of products, changes in product costs and changes in the
discount rates used could lead to significant impairment charges.
Estimates are also made in an acquisition when determining the
fair values and remaining useful lives of acquired intangible and
tangible assets.
Accounting policies
Property, plant and equipment
Property, plant and equipment is stated at historical cost. Costs of
assets of acquired in business combinations are determined at fair
value at the acquisition date. 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.
Major renovations are capitalised and depreciated over the useful
lives of the related asset. Ordinary expenses for repairs and
maintenance are expensed as incurred.
Gains and losses on disposals are determined by comparing the
disposal proceeds with the carrying amount and are included in other
operating income and other operating expenses, respectively.