UPM Annual Report 2016

ACCOUNTS

UPM Annual Report 2016

160

161

In brief

Strategy

Businesses

Stakeholders

Governance

Accounts

CONTENTS

How we tailored our group audit scope

We tailored the scope of our audit, taking into account the structure

of the UPM group, the accounting processes and controls, and the

industry in which the group operates.

We determined the type of work that needed to be performed at

group companies by us, as the group engagement team, or by

auditors from other PwC network firms operating under our

instruction. Audits were performed in group companies which were

considered significant either because of their individual financial

significance or due to their specific nature, covering the majority of

revenue, assets and liabilities of the group. Selected specified

procedures as well as analytical procedures were performed to cover

the remaining group companies.

MATERIALITY

Overall group materiality

EUR 54 million (60 million).

How we determined it

5% of profit before tax.

Rationale for the materiality benchmark

applied

We chose profit before taxes as the benchmark because, in our view, it is the benchmark against

which the performance of the group is commonly measured by users, and is a generally accepted

benchmark. We chose 5% which is within the range of acceptable quantitative materiality thresholds

in auditing standards.

Key audit matters

Key audit matters are those matters that, in our professional judgment,

were of most significance in our audit of the financial statements of

the current period. These matters were addressed in the context of

our audit of the financial statements as a whole, and in forming our

opinion thereon, and we do not provide a separate opinion on these

matters.

As in all of our audits, we also addressed the risk of management

override of internal controls, including among other matters

consideration of whether there was evidence of bias that represented

a risk of material misstatement due to fraud.

KEY AUDIT MATTER IN THE AUDIT OF THE GROUP

HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER

Valuation of forest assets

Refer to note 4.2

, in the consolidated financial statements for the

related disclosures.

The group owns about one million hectares of forests and plantations in

Finland, the United States and Uruguay valued at EUR 1,734 million at

31 December 2016. Forest assets are measured at fair value less cost to

sell. 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. Main factors used in the valuation are estimates for

growth and wood harvested, stumpage prices and discount rates.

We focused on this area as the amounts are material, the valuation

process is complex and judgmental and is based on assumptions that

are affected by expected future market or economic conditions.

In testing the valuation of forest assets, in conjunction with our valuation

specialists we:

• Assessed the methodologies adopted by management for the valua-

tion;

• Tested the mathematical accuracy of the model used for valuation;

• Assessed the discount rates applied in the valuation;

• Assessed the other key valuation assumptions; and,

• Validated key inputs and data used in valuation model such as stum-

page price, trend price forecast, tree growth assumptions, consumer

price index and inflation.

We found the methodologies used and the assumptions applied to be

appropriate.

Valuation of energy shareholdings

Refer to note 4.3

, in the consolidated financial statements for the

related disclosures

The energy shareholdings amounted to EUR 1,932 million at 31

December 2016. The energy shareholdings are unlisted equity

investments in energy companies and are valued at fair value through

other comprehensive income, net of tax if applicable.

The fair value is determined on a discounted cash flow basis. The main

factors impacting the future cash flows include future electricity prices,

price trends, discount rates and the start-up schedule of the nuclear

power plant unit Olkiluoto 3.

We focused on this area as the amounts are material, the valuation

process is complex and judgmental and is based on assumptions that

are affected by expected future market or economic conditions.

In testing the valuation of the energy shareholdings, in conjunction with

our valuation specialists we:

• Assessed the methodology adopted by management for the valua-

tion;

• Tested the mathematical accuracy of the model used for valuation;

• Assessed the future electricity prices and price trends;

• Assessed the discount rate applied in the valuation;

• Validated the Olkiluoto 3 nuclear power plant unit start-up schedule

against the most recent available information;

• Validated key inputs and data used in valuation model such as pro-

duction costs and volumes, UPM’s ownership percentages, inflation,

tax rate and net debt.

We found the methodologies and the assumptions applied to be

appropriate.

KEY AUDIT MATTER IN THE AUDIT OF THE GROUP

HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER

Recoverability of deferred tax assets

Refer to note 7.2

, in the consolidated financial statements for the

related disclosures.

The group has recognised deferred tax assets of EUR 226 million on

net operating loss carry-forwards, of which most relates to German

subsidiaries. In Germany the net operating loss carry-forwards do not

expire. We focused on this area because the recognition of deferred

tax assets relies on the significant application of judgement by the

management in respect of assessing the probability and sufficiency of

future taxable profits.

We assessed whether historical profitability in German subsidiaries

support the recognition of the deferred tax asset. Despite recent history

of profits for the German tax group we also assessed whether the

management’s forecasts of future profitability support the recoverability

of deferred tax assets.

Litigations

Refer to note 9.2

, in the consolidated financial statements for the

related disclosures.

We focused on this area because the group is subject to challenge in

respect of a number of legal matters, many of which are beyond its

control. Consequently, management makes judgements about the

incidence and quantum of such liabilities arising from litigation which are

subject to the future outcome of legal processes. In particular the group

has disclosed that it is participating in a project to construct a new

nuclear power plant unit Olkiluoto 3 through its shareholdings in

Pohjolan Voima Oy. The supplier AREVA-Siemens, which is constructing

the power plant unit initiated arbitration proceedings in 2008 and

submitted a claim concerning the delay of project and related costs.

We evaluated the group’s assessment of the nature and status of

litigations and claims and discussed them with group management

including in-house counsel for signi cant cases.

We examined the group’s conclusions with respect to the disclosures

made for signi cant cases, both considering the correspondence between

the group and its external legal counsel and independently

communicating with certain of those external legal counsel.

As set out in the nancial statements, the outcome of such cases is

dependent on the future outcome of continuing legal processes and

consequently the disclosures are subject to inherent uncertainty.

Responsibilities of the Board of Directors and the

Managing Director for the Financial Statements

The Board of Directors and the Managing Director are responsible for

the preparation of consolidated financial statements that give a true

and fair view in accordance with International Financial Reporting

Standards (IFRS) as adopted by the EU, and of financial statements

that give a true and fair view in accordance with the laws and

regulations governing the preparation of financial statements in

Finland and comply with statutory requirements. The Board of

Directors and the Managing Director are also responsible for such

internal control as they determine is necessary to enable the

preparation of financial statements that are free from material

misstatement, whether due to fraud or error.

In preparing the financial statements, the Board of Directors and

the Managing Director are responsible for assessing the parent

company’s and the group’s ability to continue as going concern,

disclosing, as applicable, matters relating to going concern and using

the going concern basis of accounting. The financial statements are

prepared using the going concern basis of accounting unless there is

an intention to liquidate the parent company or the group or cease

operations, or there is no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the

Financial Statements

Our objectives are to obtain reasonable assurance on whether the

financial statements as a whole are free from material misstatement,

whether due to fraud or error, and to issue an auditor’s report that

includes our opinion. Reasonable assurance is a high level of

assurance, but is not a guarantee that an audit conducted in

accordance with good auditing practice will always detect a material

misstatement when it exists. Misstatements can arise from fraud or

error and are considered material if, individually or in the aggregate,

they could reasonably be expected to influence the economic

decisions of users taken on the basis of these financial statements.

As part of an audit in accordance good auditing practice, we

exercise professional judgment and maintain professional skepticism

throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial

statements, whether due to fraud or error, design and perform audit

procedures responsive to those risks, and obtain audit evidence that

is sufficient and appropriate to provide a basis for our opinion. The

risk of not detecting a material misstatement resulting from fraud is

higher than for one resulting from error, as fraud may involve collu-

sion, forgery, intentional omissions, misrepresentations, or the

override of internal control.

• Obtain an understanding of internal control relevant to the audit in

order to design audit procedures that are appropriate in the circum-

stances, but not for the purpose of expressing an opinion on the

effectiveness of the parent company’s or the group’s internal cont-

rol.

• Evaluate the appropriateness of accounting policies used and the

reasonableness of accounting estimates and related disclosures

made by management.

• Conclude on the appropriateness of the Board of Directors’ and the

Managing Director’s use of the going concern basis of accounting

and based on the audit evidence obtained, whether a material

uncertainty exists related to events or conditions that may cast

significant doubt on the parent company’s or the group’s ability to

continue as a going concern. If we conclude that a material uncer-

tainty exists, we are required to draw attention in our auditor’s

report to the related disclosures in the financial statements or, if

such disclosures are inadequate, to modify our opinion. Our conclu-

We have no key audit matters to report with respect to our audit of the parent company financial statements.