UPM Annual Report 2016

128-129 / 176

ACCOUNTS
UPM Annual Report 2016 UPM Annual Report 2016 128 129
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CONTENTS
UPM has undergone several restructurings in recent years including
mill closures and profit improvement programs. Restructuring
provisions recognised include various restructuring activities including
dismantling costs. Termination provisions include severance payments,
unemployment compensations or other arrangements for employees
leaving the company. In Finland termination provisions include also
unemployment arrangements and disability pensions. Unemployment
provisions in Finland are recognised 2–3 years before the granting
and settlement of the compensation.
At 31 December 2016, restructuring provisions and termination
provisions relate mainly to capacity closures in UPM Paper ENA
business area. In 2016, UPM has closed Madison paper mill in the
US. Paper machine 3 at UPM Steyrermühl mill in Austria and paper
machine 2 at UPM Augsburg mill in Germany closures are planned
to take place in 2017. Total provisions made relating to these closures
amounted to EUR 53 million in 2016. At 31 December 2015,
restructuring provisions and termination provisions related mainly to
mill closures of prior years and operational restructuring in Finland
and France.
The group recognises provisions for normal environmental
remediation costs expected to be incurred in a future period upon a
removal of non-current assets and restoring industrial landfills where
a legal or constructive obligation exists.
Other provisions are mainly attributable to onerous contracts and
will be incurred over a period longer than one year.
Provisions for emissions include liability to cover the obligation to
return emission rights. The group possesses emission rights amounting
to EUR 45 million (52 million) as intangible assets. » Refer Note 2.3
Operating expenses and other operating income, for further
information on emission rights.
Accounting policies
A provision is recognised when a present legal or constructive
obligation exists as a result of a past event and it is probable that
an outflow of resources will be required to settle the obligation and
the amount can be reliably estimated. Provisions are split between
amounts expected to be settled within 12 months of the balance sheet
date (current) and amounts expected to be settled later (non-current).
Restructuring and termination provisions
A restructuring provisions is recognised when a detailed plan for the
implementation of the measures is complete and when the plan has
been communicated to those who are affected. Employee termination
provisions are recognised when the group has communicated the plan
to the employees.
Environmental provisions
Environmental expenditures that relate to an existing condition
caused by past operations that do not contribute to future earnings
are expensed. The recognition of environmental provisions is based
on current interpretations of environmental laws and regulations.
Such provisions are recognised when the group has an obligation to
dismantle and remove a facility or an item of plant and to restore the
site on which it is located. The amount recognised is the present value
of the estimated future expenditure determined in accordance with
local conditions and requirements. A corresponding item of property,
plant and equipment of an amount equivalent to the provision is also
recognised and subsequently depreciated as part of the asset.
Provisions do not include any third-party recoveries.
Emission provisions
Emission obligations are recognised in provisions based on realised
emissions. The provision is measured at the carrying amounts of the
corresponding emission rights held, which are recognised as
intangible assets. In case of deficit in emission rights, the shortage
is valued at the market value at the balance sheet date.
Key estimates and judgements
Environmental provisions
The estimates used in determining the provisions are based on the
expenses incurred for similar activities in the current reporting period
taking into account the effect of inflation, cost-base development and
discounting. Because actual outflows can differ from estimates due to
changes in laws, regulations, public expectations, technology, prices
and conditions, and can take place many years in the future, the
carrying amounts of provisions are regularly reviewed and adjusted
to take into account of any such changes. The discount rate applied
is reviewed annually.
The group aims to operate in compliance with regulations related
to the treatment of waste water, air emissions and landfill sites.
However, unexpected events during production processes and waste
treatment could cause material losses and additional costs in the
group’s operations.
Legal contingencies
Management judgement is required in measurement and recognition
of provisions related to pending litigation. Provisions are recorded
when the group has a present legal or constructive obligation as
a result of past event, an unfavourable outcome is probable and
the amount of loss can be reasonably estimated. Due to inherent
uncertain nature of litigation, the actual losses may differ significantly
from the originally estimated provision. » Refer Note 9.2 Litigation for
details of legal contingencies.
EURm 2016 2015
Inventories 1,346 1,376
Trade receivables 1,360 1,436
Trade payables –994 –917
Advances received –19 –20
Total 1,694 1,875
EURm 2016 2015
Raw materials and consumables 625 646
Work in progress 54 54
Finished products and goods 645 642
Advance payments 23 34
Total 1,346 1,376
EURm 2016 2015
Trade receivables
Undue 1,211 1,193
Past due up to 30 days 114 159
Past due 31–90 days 17 45
Past due over 90 days 18 39
Total trade receivables 1,360 1,436
Prepayments and accrued income
Personnel expenses 5 9
Interest income 1 3
Energy and other excise taxes 60 66
Other items 69 56
Total prepayments and accrued income 134 134
Other receivables
VAT and other indirect taxes receivable 170 131
Other 62 42
Total other receivables 231 173
Total 1,726 1,743
4.6 Working capital
The group defines operating working capital as inventories, trade
receivables and trade payables which are presented separately
below. UPM is focusing on working capital efficiency and targeting
a sustainable and permanent reduction in operating working capital.
Operational credit risk
Operational credit risk is defined as the risk where UPM is not able to
collect the payments for its receivables. The group has a credit policy
in place and the exposure to credit risk is monitored on an ongoing
basis. Outstanding trade receivables, days of sales outstanding (DSO)
and overdue trade receivables are followed on monthly basis.
Potential concentrations of credit risk with respect to trade and other
receivables are limited due to the large number and the geographic
dispersion of customers. Customer credit limits are established and
monitored, and ongoing evaluations of their financial condition is
performed. Most of the receivables are covered by trade credit
insurances. In certain market areas, including Asia and Northern
Africa, measures to reduce credit risks include letters of credit,
prepayments and bank guarantees. Maximum exposure to credit risk,
without taking into account any credit enhancements, is the carrying
amount of trade and other receivables.
UPM does not have significant concentration of customer credit
risk. The ten largest customers accounted for approximately 18%
(20%) of the trade receivables as at 31 December 2016 – i.e.,
approximately EUR 239 million (285 million).
In 2016, trade receivables amounting to EUR 10 million (18 million)
were impaired and the loss was recorded under other costs and
expenses. Impairment is recognised when there is objective evidence
that the group is not able to collect the amounts due. There are no
indications that the debtors will not meet their payment obligations
with regard to trade receivables that are not overdue or impaired at
31 December 2016.
EURm 2016 2015
Accrued expenses and deferred income
Personnel expenses 212 203
Interest expenses 30 35
Indirect taxes 5 4
Customer rebates and other items 205 188
Total accrued expenses and deferred income 451 430
Advances received 19 20
Trade payables 994 917
Other current liabilities 130 96
Total 1,594 1,463
Operating working capital
Inventories
Trade and other receivables Trade and other payables
Accounting policies
Inventories
Inventories are stated at the lower of cost and net realisable value.
Cost is determined by the method most appropriate to the particular
nature of inventory, the first-in, first-out (FIFO) or weighted average
cost. The cost of finished goods and work in progress comprises raw
materials, direct labour, other direct costs and related production
overheads (based on normal operating capacity) but excludes
borrowing costs. Net realisable value is the estimated selling price
in the ordinary course of business, less the costs of completion and
selling expenses. If the net realisable value is lower than cost,
a valuation allowance is established for inventory obsolescence.
Trade receivables
Trade receivables arising from selling goods and services in the
normal course of business are recognised initially at fair value and
subsequently measured at amortised cost, less a provision for
impairment. Provision for impairment is charged to the income
statement when there is objective evidence that the group will not
be able to collect all amounts due according to the original terms of
receivables. In determining the recoverability of trade receivables the
group considers any change to the credit quality of trade receivables.
Significant financial difficulties of the debtor, probability that the
debtor will enter bankruptcy, or default or delinquency in payments
more than 90 days overdue are considered indicators that the trade
receivable may be irrecoverable. Subsequent recoveries of amounts
previously written off are credited to the income statement. The
carrying amount of trade receivables approximates to their fair value
due to the short-term nature of the receivables.
Trade payables
Trade payables arise from purchase of inventories, fixed assets and
goods and services in the ordinary course of business from UPM’s
suppliers. Trade and other payables are classified as current liabilities
if they are due to be settled within the normal operating cycle of the
business or within 12 months from the balance sheet date. Trade
payables are recognised initially at fair value and subsequently
at amortised cost using the effective interest method. The carrying
amount of trade payables approximates to their fair value due to the
short-term nature of the payables.