UPM Annual Report 2016

124-125 / 176

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UPM Annual Report 2016 UPM Annual Report 2016 124 125
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CONTENTS
Accounting policies
The group divides all its forest assets for accounting purposes into
growing forests, which are recognised as forest assets at fair value
less costs to sell, and land, which is stated at cost. Any changes in the
fair value of the growing forests are recognised in the operating profit
in the income statement. The fair value is calculated on the basis of
discounted future expected cash flows as there is a lack of a liquid
market. Young saplings are valued at cost. The fair value of forest
assets is a level 3 measure in terms of the fair value measurement
hierarchy.
Key estimates and judgements
Fair valuation
The valuation process of forest assets is complex and requires
management estimates and judgment on assumptions that have
a significant impact on the valuation of the group’s forest assets.
Main factors used in the fair valuation of forest assets are estimates
for growth and wood harvested, stumpage prices and discount rates.
Stumpage price forecasts are based on the current prices adjusted by
the management’s estimates for the full remaining productive lives of
the trees, up to 100 years for forests in Finland and in the US and up
to 10 years for plantations in Uruguay. The cash flows are adjusted by
selling costs and risks related to the future growth. Felling revenues
and maintenance costs are estimated on the basis of actual costs and
prices, taking into account the group’s projection of future price and
costs development. In addition, calculations take into account
environmental restrictions.
The pre-tax discount rate used to determine the fair value of
the Finnish forests in 2016 was 7.0% (7.0%) and for Uruguayan
plantations 10.0% (10.0%). A decrease (increase) of one percentage
point in discount rate would increase (decrease) the fair value of
forest assets by approximately EUR 240 million (260 million).
Change in fair value, change due to harvesting and gains or losses
on sale of forest assets are recognised in the income statement as a
net amount totalling to EUR 88 million (352 million) in 2016.
In 2015, the fair value of forest assets in Finland was increased by
EUR 265 million due to adjustment of long-term wood price estimates
and change in discount rate. UPM continues to estimate a declining
trend of real wood prices in Finland, although with a slightly slower
rate than previously. In addition, the pre-tax discount rate used to
determine the fair value of the Finnish forests was lowered from 7.5%
to 7.0% in 2015.
Number of shares Group holding % Carrying value, EURm
2016 2015
Pohjolan Voima Oy, A series 8,176,191 61.24 315 324
Pohjolan Voima Oy, B series 4,140,132 58.11 1,036 1,166
Pohjolan Voima Oy, B2 series 2,414,940 51.13 179 169
Kemijoki Oy 179,189 7.33 297 314
Länsi-Suomen Voima Oy 10,220 51.10 92 92
Other – – 13 20
Carrying value, at 31 December 1,932 2,085
EURm 2016 2015
Carrying value, at 1 January 1,738 1,469
Additions 26 16
Disposals –72 –72
Wood harvested –106 –91
Net change in fair value 133 377
Reclassifications –1 –
Translation differences 15 39
Carrying value, at 31 December 1,734 1,738
PVO’s share capital is divided into different series of shares. The B
and B2 series relate to PVO’s shareholdings in Teollisuuden Voima
Oyj (TVO). UPM has no direct shareholdings in TVO. TVO operates
two nuclear power plants (Olkiluoto 1 and Olkiluoto 2) and constructs
one new nuclear power plant in Olkiluoto (Olkiluoto 3), Finland.
The operation of a nuclear power plant is governed by international,
European Union and local nuclear regulatory regimes. Pursuant to the
Finnish Nuclear Liability Act, the operator of a nuclear facility has a
strict third-party liability in relation to nuclear accidents. Shareholders
of power companies that own and operate nuclear power plants are
not subject to the liability under the Nuclear Liability Act. In Finland,
the future costs of conditioning, storage and final disposal of spent
fuel, management of low and intermediate level radioactive waste as
well as nuclear power plant decommissioning are provided for by a
state established fund (the Finnish State Nuclear Waste Management
Fund). The contributions to the Fund are intended to be sufficient to
cover estimated future costs. These contributions have been taken into
consideration in the fair value of the related energy shareholdings.
4.2 Forest assets
UPM is both a major forest owner and a purchaser of wood. Wood is
a renewable material and the most important raw material for UPM’s
businesses. At the end of 2016, UPM owned 640,000 hectares of
forest in Finland and 75,000 hectares of forest in United States. The
company additionally has 255,000 hectares of forest plantations in
Uruguay. The value of forest assets amounted to EUR 1,734 million
(1,738 million) at the end of 2016. In 2016, UPM sourced 27.8 (26.1)
million cubic meters of wood from around the world.
4.3 Energy shareholdings
UPM is both a significant purchaser and producer of energy.
The majority of electrical and thermal energy is consumed at the
group’s pulp and paper production. The production is mainly carried
out by energy companies in which UPM has energy shareholdings.
Energy shareholdings are unlisted equity investments. UPM does not
have control or joint control of or significant influence in the said
energy companies.
The value of energy shareholdings amounted to EUR 1,932 million
(2,085 million) at the end of 2016. These energy companies supply
energy or both energy and heat to their shareholders on a cost-price
principle (Mankala-principle) which is widely applied in the Finnish
energy industry. Under the Mankala-principle energy and/or heat is
supplied to the shareholders in proportion to their ownership and each
shareholder is, pursuant to the specific stipulations of the respective
articles of association, severally responsible for its respective share of
the production costs of the energy company concerned.
EURm 2016 2015
Carrying value, at 1 January 2,085 2,510
Additions – 33
Impairment charges 1 –
Disposals –6 –35
Reclassifications into level 3 – 1
Changes in fair value recognised in other
comprehensive income –148 –424
Carrying value, at 31 December 1,932 2,085
Accounting policies
Purchases of energy shareholdings are recognised on the settlement
date initially at cost, including transaction costs, and subsequently
measured at fair value through other comprehensive income, net of
tax if applicable. When the investments are sold or impaired, the
accumulated fair value adjustments in equity are recognised through
the income statement. Significant or prolonged decline in the fair
value of the security below its cost is considered when determining
whether the investments are impaired. Any impairment losses
recognised for these investments are not subsequently reversed.
The fair value of energy shareholdings is a level 3 measure in
terms of the fair value measurement hierarchy.
Key estimates and judgements
Fair valuation and sensitivity
Valuation of energy shareholdings requires management’s
assumptions and estimates of a number of factors that may differ from
the actual outcome which could lead to significant adjustment to the
carrying amount of the asset. Fair value is determined on a discounted
cash flow basis and the main factors impacting the future cash flows
include future electricity prices, price trends and discount rates.
The electricity price estimate is based on a simulation of the Finnish
area electricity price. A change of 5% in the electricity price used in
the model would change the total value of the assets by EUR 333
million. The discount rate of 5.85% used in the valuation model is
determined using the weighted average cost of capital method.
A change of 0.5% in the discount rate would change the estimated
fair value of the assets by approximately EUR 310 million.
Forest assets
Energy shareholdings
Other uncertainties and risk factors relate to start-up schedule of
the fixed price turn-key Olkiluoto 3 EPR nuclear power plant project
and the on-going arbitration proceedings between the plant supplier
AREVA-Siemens Consortium and the plant owner Teollisuuden Voima
Oyj (TVO). UPM’s indirect share of the capacity of Olkiluoto 3 EPR is
approximately 31%, through its PVO B2 shares. The possible outcome
of the arbitration proceedings has not been taken into account in the
valuation. Changes in regulatory environment or taxation could also
have an impact on the energy shareholdings’ value.
» Refer Note 9.2 Litigation, for further information.
4.4 Goodwill and other intangible assets
The group’s goodwill mainly relates to pulp operations in Finland and
Uruguay belonging to UPM Biorefining business area.to be updated
UPM Biorefining 91%
Other operations 1% UPM Plywood 5%
UPM Raflatac 3%
Goodwill by business area
2016 and 2015
EURm 2016 2015
UPM Biorefining 223 220
UPM Raflatac 7 7
UPM Plywood 13 13
Other operations 1 1
Total 245 241
Goodwill
EURm 2016 2015
Carrying value, at 1 January 241 230
Translation differences 3 11
Carrying value, at 31 December 245 241
Goodwill by business area