UPM Annual Report 2016

126-127 / 176

ACCOUNTS
UPM Annual Report 2016 UPM Annual Report 2016 126 127
In brief Strategy Businesses Stakeholders Governance Accounts
CONTENTS
EURm INTANGIBLE RIGHTS
SOFTWARE AND
OTHER INTANGIBLE
ASSETS TOTAL
2016
Accumulated costs 523 665 1,189
Accumulated amortisation and impairments –306 –628 –933
Carrying value, at 31 December 218 38 256
Carrying value, at 1 January 224 53 277
Additions 5 7 12
Disposals – –1 –1
Amortisation –6 –19 –25
Impairment – –2 –2
Reclassifications –4 – –3
Translation differences –1 – –1
Carrying value, at 31 December 218 38 256
Emission rights, net carrying value 1) 45
Carrying value including emission rights, at 31 December 301
2015
Accumulated costs 536 669 1,205
Accumulated amortisation and impairments –312 –616 –928
Carrying value, at 31 December 224 53 277
Carrying value, at 1 January 226 71 297
Additions 4 7 11
Amortisation –8 –25 –33
Translation differences 2 – 2
Carrying value, at 31 December 224 53 277
Emission rights, net carrying value 1) 52
Carrying value including emission rights, at 31 December 329
1) » Refer Note 2.3 Operating expenses and other operating income, for further information on emission rights.
Other intangible assets
Impairment testing
Impairment tests for goodwill and water rights with indefinite life were
carried out in the fourth quarter 2016. The values of water rights were
tested based on expected future cash flows of each separate hydro­
power plant. Water rights of hydropower plants belonging to UPM
Energy and reported in intangible rights amounted EUR 189 million
at the end of 2016 and 2015.
Goodwill impairment tests were carried out for pulp operations in
Finland and Uruguay, belonging to UPM Biorefining business area,
UPM Raflatac business area and UPM Plywood business area.
The 2016 impairment tests did not result in a recognition of any
impairment.
The basis for valuation and key assumptions used in goodwill
impairment testing are summarised in below table.
CASH GENERATING UNIT BASIS OF VALUATION PERIOD OF FORECAST PRE-TAX DISCOUNT RATE KEY ASSUMPTIONS
Pulp operations Finland Value in use 10 years + terminal value 10.92% (2015: 11.02%) Pulp price, wood costs
Pulp operations Uruguay Value in use 10 years + terminal value 10.38% (2015: 10.38%) Pulp price, wood costs
UPM Raflatac Value in use 10 years + terminal value 9.94% (2015: 9.94%) Product prices, cost development
UPM Plywood Value in use 10 years + terminal value 10.35% (2015: 10.35%) Product prices, cost development
Sensitivity analyses
The sensitivity analyses of goodwill impairment tests indicate that no
reasonable change in key assumptions would result in recognition of
impairment loss against goodwill. In pulp operations the recoverable
amount is most sensitive to pulp sales prices and the cost of wood raw
material.
As at 31 December 2016, for pulp operations Finland, a decrease
of more than 15.8% in pulp prices would result in recognition of
impairment loss against goodwill. The group believes that no
reasonable change in wood cost would cause the aggregate carrying
amount to exceed the recoverable amount. For pulp operations
Uruguay, a decrease of more than 3.2% in pulp prices or an increase
of more than 9.2% in wood cost would result in recognition of
impairment loss against goodwill. A decrease of more than 5.0% in
pulp prices or an increase of more than 14.2% in wood cost would
result in a write-down of the entire goodwill.
Key estimates and judgements
The group’s assessment of the carrying value of goodwill and
indefinite life assets requires significant judgement.
While management believes that estimates of future cash flows are
reasonable, different assumptions are subject to change as a result of
changing economic and operational conditions. Actual cash flows
could therefore vary from estimated discounted future cash flows and
could result in changes in the recognition of impairment charges in
future periods.
Future cash flows
The review of recoverable amount for goodwill and indefinite life
assets is based on a calculation of value in use, using management
projections of future cash flows. The most important assessments and
assumptions needed in calculations are forecasts for future growth
rates for the business in question, product prices, cost development
and the discount rates applied. The group is using ten-year forecasts
in calculations as the nature of the group’s business is long-term, due
to its capital intensity, and is exposed to cyclical changes. In estimates
of product prices and cost development, forecasts prepared by
management for the next three years and estimates made for the
following seven years are taken into consideration. In addition,
consideration is given to the investment decisions made by the group
as well as the profitability programmes that the group has
implemented and the views of knowledgeable industry experts on
the long-term development of demand and prices. In the projection
of cash flows UPM uses EBITDA adjusted with cash flows not captured
within EBITDA, including working capital movements and capital
expenditures.
Discount rate
The discount rate is estimated using the weighted average cost of
capital (WACC) on the calculation date adjusted for risks specific
to the business in question. The adjusted after-tax discount rate is
translated to a pre-tax rate for each cash generating unit (CGU)
based on the specific tax rate applicable to where the CGU operates.
Accounting policies
Goodwill
Goodwill arises in connection with business combinations where the
consideration transferred exceeds the fair value of the acquired net
assets. Goodwill is recognised at cost less accumulated impairment
and is an intangible asset with an indefinite useful life. Goodwill is
allocated to the cash generating units that are expected to benefit
from the synergies from the business combination.
Intangible rights
Intangible rights include water rights of hydropower plants, patents,
licences, intellectual property and similar rights. Water rights are
deemed to have an indefinite useful life as the company has a
contractual right to exploit water resources in the energy production
of power plants. The values of water rights are tested annually for
impairment based on expected future cash flows of each separate
hydropower plant. Other intangible rights are recognised at cost less
accumulated depreciation and impairment. Amortisation is calculated
using the straight-line method over their estimated useful lives ranging
from 5 to 10 years.
Software and other intangible assets
Research expenditure is recognised as an expense as incurred. Costs
incurred in acquiring software that will contribute to future period
financial benefit are capitalised to software and systems. Other
intangible assets are recognised at cost less accumulated amortisation
and impairment. Amortisation is calculated using the straight-line
method over their estimated useful lives ranging from 3 to 5 years.
Impairment testing
Goodwill and other intangible assets that are deemed to have an
indefinite life are tested at least annually for impairment. For goodwill
impairment testing purposes the group identifies its cash-generating
units (CGUs), which is the smallest identifiable group of assets that
generate cash inflows largely independent of the cash inflows of other
assets or other groups of assets. Each CGU is no larger than a
business area. The carrying amount for the CGU includes goodwill,
non-current assets and working capital. If the balance sheet carrying
amount of the CGU unit exceeds its recoverable amount, an impair­
ment loss is recognised. Impairment loss 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.
Other intangible assets with indefinite useful lives are impaired if
the recoverable amount of the asset is less than the carrying amount.
The carrying amount of the asset is then reduced to the recoverable
amount which is the higher of the asset’s net selling price and its value
in use.
4.5 Provisions
EURm RESTRUCTURING TERMINATION ENVIRONMENTAL EMISSIONS OTHER TOTAL
2016
Provisions at 1 January 47 51 24 14 18 154
Provisions made during the year 16 36 5 9 4 70
Provisions utilised during the year –12 –30 –1 –10 –4 –58
Unused provisions reversed –5 –3 –7 –3 –2 –20
Provisions at 31 December 45 54 21 9 16 145
Non-current 90
Current 56
Total 145
2015
Provisions at 1 January 50 109 26 12 17 214
Provisions made during the year 3 9 – 14 6 32
Provisions utilised during the year –8 –55 –1 –11 –2 –77
Unused provisions reversed –4 –6 –1 –1 –1 –13
Companies sold – – – – –2 –2
Reclassifications 6 –6 – – – –
Provisions at 31 December 47 51 24 14 18 154
Non-current 92
Current 62
Total 154