Tornator Oyj BALANCE BOOK. 31 December 2015

Transcription

1 Tornator Oyj BALANCE BOOK 31 December 2015 Tornator Oyj Business ID: Home municipality: Imatra, Finland

2 Tornator Oyj, Board of Directors Report 2015 Net sales and results The Group s net sales were million (90.7), up 25.2%. The remarkable rise was due to forestland sales in Finland and forest ownership arrangements in Estonia. Net sales include proceeds from land and plot sales worth 30.8 million (10.8). Most of the net sales were timber sales income, 82.1 million, 72% ( 79.2 million, 87%). The total volume of timber deliveries was 2.65 million m 3 (2.75 million m 3 ), nearly the same as in the previous year. The net sales were increased by a higher average price of timber. Other operating income, 3.6 million (4.3), includes 1.2 million (1.6) in compensation for conservation areas. The remainder of other operating income is mainly land lease revenues and soil resource sales. Operating profit at fair value amounted to 56.4 million (65.0) and profit for the period was 39.1 million (loss: 27.0). The change in the fair value of biological assets decreased operating profit by 18.1 million (+2.4), but a positive change in the fair value of financial instruments increased profit by 12.4 million (-71.4) before deferred taxes. Operating profit without the change in the fair value of biological assets and net profit increased in all countries: Finland, Estonia and Romania. The Tornator Timberland Group includes, besides the parent company Tornator Oyj in Finland, Tornator Eesti OÜ (100.0%) in Estonia, and SC Tornator SRL (100.0%) and Oituz Private Forest District SRL (100.0%) in Romania. Key figures The key figures have been calculated without the effects of the changes in the fair value of biological assets and interest rate derivatives. The figures for the Group have been calculated according to the International Financial Reporting Standards (IFRS) and for the parent company according to the Finnish Accounting Standards (FAS). IFRS = International Financial Reporting Standards FAS = Finnish Accounting Standards Net sales, million THE GROUP Parent Operating profit, million THE GROUP Parent Operating profit, % of net sales THE GROUP 65.6% 69.0% 75.6% Parent 90.1% 80.8% 87.2% Profit for the period, million THE GROUP Parent Profit for the period with fair value changes, million THE GROUP Parent Return on equity THE GROUP 10.0% 6.5% 7.0% Parent 35.4% 26.6% 22.4% Return on capital employed THE GROUP 7.7% 6.5% 7.1% Equity ratio THE GROUP 38.6% 37.2% 43.0% 2

3 Distribution of revenues and non-current assets by country 1 Jan 31 Dec Jan 31 Dec 2014 Revenues: 000 % 000 % Finland 98, , Estonia and Romania 15, ,046 6 Total 113, , Jan 31 Dec Jan 31 Dec 2014 Biological assets: 000 % 000 % Finland 936, , Estonia and Romania 108, ,957 9 Total 1,045, ,047, Jan 31 Dec Jan 31 Dec 2014 Non-current assets: 000 % 000 % Finland 1,017, ,036, Estonia and Romania 126, ,621 9 Total 1,143, ,142, Notable events during the period Tornator recorded the best results in its history in Core business, i.e. timber sales and delivery, went according to plan, and significant forestland sales in Finland and Estonia additionally increased net sales to over 113 million. Intensified operations and savings in financial expenses also contributed to new records in operating profit and net profit. In Finland, Tornator sold in a single transaction some 7,100 hectares of forestland in Northern Finland to a domestic forest fund. In Estonia, Tornator s subsidiary rearranged its forestlands: after purchases and sales, the net increase was nearly 12,000 hectares. Tornator is Estonia s largest private forest owner. In Finland, Tornator s forests are certified under both the PEFC (Programme for the Endorsement of Forest Certification) and the FSC (Forest Stewardship Council). For Tornator, double certification is one way of responding to customers needs and securing a high demand for wood also in the future. The first FSC periodic audit was carried out in August 2015, concluding that Tornator s operations comply with the FSC standard requirements. Biological assets, such as growing stock in the case of Tornator, are entered in the balance sheet at market value. The value of the Group s forest assets is based on the discounted cash flow model. The fair value is calculated by a third-party appraiser on the basis of the future cash flows of continuing operations, i.e. considering sustainable forest management and the growth potential of the forests. The value of the Group s forests in the financial statements was at the previous year s level, some 1,115 million (1,115), including growing stock and land. The figures include the effects of harvesting as well as the purchases and sales of forestland. The rise in long-term market rates since the beginning of the year was reflected in the fair values of Tornator s hedges: the effect on profit or loss changed from 70 million negative in the previous year to 12 million positive before deferred taxes. Equity ratio increased to 39% (37%). Tornator s liquidity remained strong throughout the year. The financing arrangements made at the end of the previous period were reflected in decreased financial expenses. In addition, structuring of interest rate hedges and establishment of a commercial paper programme lowered interest expenses by some 4 million. 3

4 Tornator Oyj s Annual General Meeting of 5 March 2015 decided, according to the proposal of the Board of Directors, to pay out 21 million in dividend. Tornator Oyj s Board of Directors appointed Sixten Sunabacka, MSc (Agr & For), EMBA, the new Chief Executive Officer as of 1 January He joined the company on 1 October Tornator s long-time CEO Arto Huurinainen will retire at the end of February Risk management Tornator s risk management is aimed at securing profitable business in the long term and to create opportunities for well-managed risk taking using the selected strategy. It is based on systematic identification and analysis of all significant risks to the company. Tornator s risks are divided into three main categories: strategic risks, operational risks and financial risks. Examples of each category are described below. Strategic risks Tornator sells most of its cutting rights to a single customer. This creates a risk exposure that is managed with special attention. In Finland, wood demand has traditionally exceeded domestic supply, as indicated by the significant volumes of wood imports for many years. Demand is also on the rise due to new investments. In addition, the company has built good relationships with a number of medium-sized wood-processing companies and operators in the energy sector. About 25% of the Group s timber sales come from companies other than the main customer, while the main customer s share of all net sales is about 55%. Fluctuation of wood prices is a significant risk factor in terms of Tornator s results. If prices go down, Tornator can temporarily increase the volume of cutting right sales or plot and forestland sales or both. However, the company aims to follow the sustainable annual cut, thereby trying to optimise annual cash flows in the long term. In recent years, price volatility has decreased considerably in Finland. Risks concerning roundwood quantity and quality are controlled through long-term forest resource management planning and focusing operations according to the structure and ageclass distribution of the forests. To support planning, Tornator regularly commissions an independent study on the structure of company forests, using it to prepare a long-term cutting plan (more than 30 years). The latest forest inventory by the Finnish Forest Research Institute and the cutting budget based on it are from The cutting budget will be updated in Changes in current certification criteria may affect opportunities for forest utilisation and cause a loss of income for Tornator, unless there is an agreement on full compensation. FSC Finland is starting to revise its national criteria, and Tornator will be closely involved in the process. Tornator monitors the current economic trend when planning plot sales. A poorer trend may decrease the demand for holiday home plots and temporarily reduce profits. In fact, this has already happened, and therefore investments in land development have been adapted to the volume of plot sales. The risk with investments made in wind power project development is managed by preparing accurate feasibility studies before launching the projects, by selecting partners among significant players in the sector, by dispersing the projects around Finland, and by planning the projects carefully. Tornator does not participate in wind power construction or ownership of production, but sells its shares in the projects before construction and remains the lessor of land. 4

5 When utilising forest resources Tornator manages risks to the environment by complying with environmental legislation and certification criteria. Rare in Finnish forestry, double certification is a strong indicator of the company s expertise in and commitment to forest management. Risks are discussed in employee training and induction, and minimised with careful planning of operations and a high standard of implementation. What may also be considered a risk are significant new statutes or other factors impeding operations. In managing risks it is important to co-operate with authorities and various NGOs as well as to participate, for example, in regional planning. Tornator implements an open communication policy with an emphasis on sustainable operations and corporate social responsibility. Attracting and retaining skilled employees is a risk in forestry as well. Tornator is prepared for the increasing retirement of forest workers by signing on new contractors and increasing mechanised work. For salaried employees there has been proactive recruiting, which allows experienced employees to pass on their know-how before retiring. The risk is also managed with an active human resource policy. Tornator s goal is to continue expanding its operations outside Finland in countries where the growth potential is considered profitable. Geographic expansion is both a positive method of risk management and a risk. The risks of expansion are managed by selecting competent partners and reliable customers, and by balancing out long and short-term timber sales agreements. Tornator makes economic, social and environmental responsibility an integral part of its business. In all countries, the company's business is guided by a common Code of Conduct. Operational risks Tornator manages internal business risks with processes that are approved by the Board of Directors and management, and inspected by auditors. International expansion disperses risks to property and operations. Natural disasters pose a risk to forest assets. For Tornator, the size of its holdings on the one hand, and their geographic extent on the other, intrinsically work as a risk management tool. In addition, Tornator has a Finnish forest insurance policy that covers damage in case of a major disaster. However, the company has deemed it unprofitable to insure its forest holdings abroad, because the target countries presently lack an operational forest insurance market. Financial risks A substantial proportion of loan capital in the company s balance sheet constitutes a risk which Tornator manages with special attention. Ready access to the capital markets will enable the successful refinancing of the loans in the future. The company has dispersed the risks related to funding by issuing a 7-year bond besides a 5-year bank loan. The company is prepared for market rate changes with derivative contracts. Hedging is applied to mitigate the interest rate risk on the loans and to reduce the volatility of the discount rate used in calculating the fair value of forests, and therefore it will be easier to predict the development of the company s value in the long term. Liquidity management is based on advance payments and up-to-date cash management. The company also has a commercial paper programme to optimise the need for cash. Cash reserves are invested in bank deposits and short-term, highly rated funds. Tornator manages customer risks by advance payments based on sales agreements. 5

6 Notable events after the end of the period No notable events after the end of the period. An estimate of future development The company estimates that its debt service capacity will remain stable in Research and development In order to improve efficiency and to deepen know-how, Tornator decided to transform from a geographic team organisation into a process organisation during The whole personnel was involved in the preparations, and the development programme included a 360/270 assessment of the employees. The tried and tested Future Team activities were continued. The Future Team s working groups focused on boosting current business and developing new business. In addition, the company put a lot of emphasis on improving the availability and quality of forest stand data. The development of harvest monitoring was also continued. Personnel The average number of personnel remained nearly unchanged. In addition to normal pay, the company uses a reward system based on performance targets. An average of 7.0% of normal pay (6.5%) was given as performance-based bonuses in 2015, the Management Group excluded. Besides its own employees, the direct employment impact of the company s forests in other firms is estimated at up to 700 person-years. Personnel, wages and salaries Year Average number of personnel during the period Wages and salaries for the period 8.6m 9.4m 8.7m Environment The company has an environmental programme whose objectives and realisation are reviewed annually. The framework for the company's environmental management is set by forest and environmental legislation as well as the PEFC and FSC certification systems. Compliance with the certification criteria is audited annually by an external evaluator. In its forestry operations, the company complies with the Best Practice Guidelines for Forest Management published by the Forestry Development Centre Tapio. 6

7 Company organisation, management and auditors At the Annual General Meeting of 5 March 2015, the following were elected as ordinary members of the Board of Directors and their personal deputies until the next Annual General Meeting: Ordinary member Mikko Koivusalo Jari Puhakka Erkko Ryynänen Jari Suominen Esko Torsti Deputy Risto Autio Jukka Reijonen Jari Pussinen Jari Suvanto Timo Kärkkäinen Esko Torsti has acted as the Chairman of the Board with Mikko Koivusalo as Vice Chairman. These persons have also acted as the members of the Remuneration Committee which works under the Board of Directors. Mikko Koivusalo has acted as the Chairman of the Oversight Committee that oversees significant agreements between the company and the shareholders. Arto J. Huurinainen has acted as Chief Executive Officer. Chief Financial Officer Henrik Nieminen is his deputy. The Management Group was made up by Chief Executive Officer Arto J. Huurinainen, Chief Financial Officer Henrik Nieminen, Forestry Director Ari Karhapää and Real Estate Director Antero Luhtio. At the Annual General Meeting of 5 March 2015, Deloitte & Touche Oy were elected auditors with Jukka Vattulainen, APA, as principal auditor. Number of shares The parent company's share capital of 51,836, is divided into 5,000,000 shares, and all shares carry equal rights. Handling of profit The parent company's distributable profit amounted to 56,434,696.45, of which the profit for the period was 49,627, The Board of Directors of Tornator Oyj proposes to the Annual General Meeting that a dividend of 6.00 per share or 30,000, be paid. The remaining part will be carried over in the shareholders' equity. The Board proposes the dividend payment date as 14 April 2016 and the record date as 31 March

8 Major shareholders, 31 December 2015 Stora Enso Oyj 41.0% Ilmarinen Mutual Pension Insurance Company Varma Mutual Pension Insurance Company Etera Mutual Pension Insurance Company 16.9% 13.1% 6.3% OP Bank Group Pension 5.2% Fund Other shareholders 17.5% Total 100.0% Voting rights According to Tornator Oyj s Articles of Association, the votes of a shareholder at the Shareholders General Meeting may not exceed twenty (20) percent of the total number of votes carried by all shares in the company, including the voting rights of all companies and their pension funds and foundations belonging to the same group as the shareholder. As required by the Finnish Financial Supervisory Authority, a Corporate Governance Statement is presented as a separate report on the company s website at 8

9 Contents A. Consolidated financial statements Notes to the consolidated financial statements General information Summary of the most important accounting principles Accounting principles of the consolidated financial statements Subsidiaries Segment reporting Conversion of line items denominated in foreign currencies Property, plant & equipment Intangible assets Impairment of tangible and intangible assets Biological assets Leases Inventories Accounts receivable Financial assets and financial liabilities Borrowing costs Impairment of financial assets Derivatives contracts and hedge accounting Cash and cash equivalents Share capital Dividends Income taxes Employment benefits Pension liabilities Accounts payable Income recognition Operating profit Interest and dividends Application of the new and amended IFRS standards Application of new and revised IFRSs in issue but not yet effective Financial risk management Critical accounting estimates & judgements Operating segments Intangible assets Property, plant & equipment Biological assets Derivatives Inventories Trade and other receivables Available-for-sale financial assets Cash and cash equivalents Share capital and share premium fund Deferred tax assets and deferred tax liabilities Financial liabilities Pension obligations Trade and other payables Breakdown of net sales Other operating income Materials and services Personnel expenses Depreciation and amortisation expense and impairments

10 25 Other operating costs Financial income and expenses Income taxes Dividends Related party transactions Auditors fees Subsidiaries and associates on 31 December Contingent assets and liabilities and issued commitments Other collateral granted for own account Judicial proceedings Classification of financial assets and financial liabilities Fair value hierarchy of financial assets and liabilities at fair value Essential post-balance sheet date events B. Parent company financial statements 10

11 Consolidated Income Statement EUR thousand Note 1 Jan 31 Dec Jan 31 Dec 2014 Net sales 6,20 113, ,710.6 Other operating income 21 3, ,325.6 Change in inventories of finished goods and work in progress 11-13, ,228.1 Materials and services 22-11, ,856.2 Personnel expenses 23-8, ,408.6 Depreciation and amortisation 24-2, ,590.6 Other operating expenses 25-5, ,332.8 Share of profit or loss in associates Change in fair value of biological assets and harvesting 9-18, ,399.6 Operating profit 56, ,017.1 Financial income Financial expenses 26-20, ,066.2 Change in fair value of financial instruments 10 12, ,432.0 Financial expenses (net) -8, ,462.2 Profit/loss before tax 48, ,445.1 Income taxes 27-9, ,966.5 Change in deferred taxes ,395.1 Profit/loss for the financial period 39, ,016.5 Distribution: To owners of the parent company 39, ,016.5 Consolidated statement of comprehensive income Profit for the financial period 39, ,016.5 Other comprehensive income for the period after taxes: Items not recognised later through profit and loss Items derived from the re-definition of net defined benefit costs (or asset items) Items that may later be recognised through profit and loss Translation difference 15, Available-for-sale financial assets 13, Cash flow hedging 10,27 4, ,165.1 Comprehensive income for the period total 43, ,104.2 Distribution: To shareholders of the parent company 43, ,104.2 The notes on pages are a material part of these financial statements. 11

12 Consolidated Balance Sheet EUR thousand Note 31 December December 2014 ASSETS Non-current assets Intangible assets 7 3, ,661.4 Property, plant & equipment 8 85, ,912.7 Biological assets 9 1,045, ,047,399.3 Derivatives 10 8, ,897.1 Investments in associates Other investments Non-current assets total 1,143, ,142,874.2 Current assets Inventories 11 3, ,070.2 Trade and other receivables 12 4, ,355.8 Available-for-sale investments 13 8, ,630.8 Cash and cash equivalents 14 20, ,857.6 Current assets total 37, ,914.4 Total assets 1,180, ,190,788.6 EQUITY AND LIABILITIES Equity belonging to shareholders of the parent company Share capital 15 50, ,000.0 Other equity , ,016.0 Shareholders equity total 453, ,016.0 Non-current liabilities Deferred tax liabilities 16 96, ,042.6 Financial liabilities , ,006.6 Derivatives 10 86, ,615.2 Pension liabilities Non-current liabilities total 649, ,989.4 Current liabilities Financial liabilities 17 51, ,519.6 Trade and other payables 19 22, ,147.1 Derivatives 10 4, Current liabilities total 77, ,783.3 Total liabilities 727, ,772.7 Total equity and liabilities 1,180, ,190,788.6 The notes on pages are a material part of these financial statements. 12

13 Statement of changes in equity EUR thousand Note Share capital Share premium Translation difference Fair value reserve Retained earnings Shareholders' equity total Equity 1 January , , , , , ,120.2 Comprehensive income Profit or loss for the period -27, ,016.5 Other items of comprehensive income (after taxes) Remeasurement of net defined benefit liability (or asset) Translation difference 15, Available-for-sale financial assets 13, Cash flow hedging 10, 27 3, ,165.1 Comprehensive income for the period Transactions with shareholders 50, , , , , ,016.0 Dividends paid 28-22, ,000.0 Total transactions with shareholders -22, ,000.0 Equity 31 December , , , , , ,016.0 Equity 1 January , , , , , ,016.0 Comprehensive income Profit or loss for the period 39, ,133.5 Other items of comprehensive income (after taxes) Remeasurement of net defined benefit liability (or asset) Translation difference 15, Available-for-sale financial assets 13, Cash flow hedging 10, 27 4, ,489.9 Comprehensive income for the period Transactions with shareholders 50, , , , , ,338.7 Dividends paid 28-21, ,000.0 Total transactions with shareholders -21, ,000.0 Equity 31 December , , , , , ,338.7 The notes on pages are a material part of these financial statements. 13

14 Consolidated cash flow statement EUR thousand 1 Jan 31 Dec Jan 31 Dec 2014 Cash flow from operating activities Cash receipts from customers 81, ,862.3 Proceeds from sale of tangible assets 30, ,106.6 Cash receipts from other operating income 3, ,210.5 Cash paid to suppliers and employees -25, ,218.6 Cash flow from operating activities before financial items and taxes 89, ,960.9 Interest paid and other financial expenses -20, ,337.8 Interest received Income taxes paid -6, ,853.9 Net cash flow from operating activities 62, ,811.6 Cash flow from investing activities Investments in biological assets -28, ,063.6 Investments in tangible assets, forestland -3, ,097.7 Investments in other tangible and intangible assets -3, ,272.1 Investments in associates and other investments Investments in available-for-sale financial assets 0.0-2,240.9 Proceeds from sale of available-for-sale financial assets 1, Net cash flow from investing activities -34, ,674.4 Cash flow from financing activities Withdrawal of long-term loans ,000.0 Repayment of long-term loans -4, ,563.0 Withdrawal of short-term loans 57, ,000.0 Repayment of short-term loans -67, Dividends paid -21, ,000.0 Net cash flow from financing activities -35, Net increase/decrease in cash and cash equivalents -7, ,425.7 Cash and cash equivalents at beginning of period 28, ,284.2 Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of period 20, ,857.6 The notes on pages are a material part of these financial statements. 14

15 Consolidated financial statements 31 December Notes to the consolidated financial statements General information Tornator Oyj is a Finnish limited liability company that operates under the jurisdiction of the legislation of the State of Finland. The Group s registered office is in Imatra and the address of its headquarters is Napinkuja 3 C, Imatra, Finland. A copy of the consolidated financial statements is also available from this address. Tornator Oyj is one of Finland s largest forest owners. The Group also provides forest management services, sells land for recreational use and buys forest properties. At the end of 2015, the Group owned about 650,000 hectares of forest property (640,000). Tornator Oyj s main market is Finland, but the Group also has forest property in Romania and Estonia. The Tornator Board of Directors approved these financial statements for issue on 3 February According to the Finnish Limited Liability Companies Act, the Annual General Meeting has the option to approve or reject or change the financial statements. 2 Summary of the most important accounting principles The most important accounting principles followed in the preparation of the financial information on the Group are explained below. These accounting principles have been applied in all the presented years. Accounting basis The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), and the IAS and IFRS standards and SIC and IFRIC interpretations in force on 31 December 2015 have been applied in preparing them. International Financial Reporting Standards refers to the standards defined in the Finnish Accounting Act and related regulations approved for application in the EU and their interpretations in accordance with EU regulation (EC) 1606/2002. The notes to the consolidated financial statements also comply with the requirements of the Finnish accounting and corporate legislation that supplements the IFRS regulations. The consolidated financial statements have been prepared using the historical cost basis, except for current available-for-sale financial assets, financial assets and liabilities recognised at fair value through profit and loss, biological assets, derivative financial instruments and items under hedging of fair value, which are measured at fair value. The financial statements are presented in thousands of euros unless otherwise noted. The company s functional currency is the euro. The preparation of the consolidated financial statements according to the IFRS standards requires the making of certain estimates and assumptions. The making of these assumptions and estimates has an impact on the assets and liabilities reported on the balance sheet date, the presentation of contingent assets and liabilities in the notes and the income and expenses reported for the financial year. These estimates are based on the management s best knowledge of the events; thus the final actual results may differ from the estimates made. Areas that have required greater judgement and areas in which the judgement has had the greatest impact on the figures presented in the financial statements are presented in Note 4. 15

16 3 Accounting principles of the consolidated financial statements Subsidiaries The consolidated financial statements include the companies of which the Group controls over half of the votes or over which it exercises control in some other way. The Group s mutual shareholding has been eliminated by means of the acquisition cost method. Subsidiaries are included in the consolidated financial statements starting from the date on which the Group assumes control over them, and they are removed from the statements on the date on which control is relinquished. The amount by which the acquisition cost exceeds the Group s share of the fair value of the itemisable net assets is entered as goodwill. If the acquisition cost is smaller than the net assets of the acquired subsidiary, the difference will be entered directly in a separate income statement. Intra-group transactions, receivables, debts and unrealised profits are eliminated when the consolidated financial statements are prepared. Unrealised losses are not eliminated if the loss is incurred due to impairment. When necessary, the accounting principles of the financial statements of subsidiaries have been amended to correspond to the consolidated accounting principles. Since the acquisitions of subsidiaries have not satisfied the definition of a business, they have been handled as acquisitions of asset items. The consolidated financial statements contain the financial information of the parent company Tornator Oyj and its 100% owned subsidiaries SC Tornator SRL and Tornator Eesti Oü. Associated companies Associated companies (associates) are entities over which the Group has significant influence. Significant influence arises normally when the Group owns over 20 % of votes or when the Group otherwise has significant influence but not control. Associates are consolidated using the equity method. If the Group s share of the net loss of an associate exceeds its book value, investment is recognized in the balance sheet at zero value and the excess loss is not consolidated, unless the Group is committed to fulfilling the obligations of the associates. Investments in associates include the implicit goodwill of the acquisition. Unrealized gains and losses on transactions between the Group and associates are eliminated according to the Group s ownership. Unrealised losses are not eliminated if the transaction provides evidence of an impairment of the asset. Group's share of the net profit or loss of associates is shown before operating profit. Similarly, the Group's share of associates' other comprehensive income is recognized in the Group's other comprehensive income. The Group's associates have not had any such items for financial periods 2014 and Segment reporting Operating segments are determined and reported in a manner which is consistent with internal reporting to the highest operational decision-maker. According to the internal reports, the Group has one operating segment and, thus, separate segment notes are not presented. Conversion of line items denominated in foreign currencies (a) Functional and presentational currencies Items included in the financial statements of the Group companies are valued in the currency of the operational environment in which the company primarily operates (the functional currency ). The consolidated financial statements are presented in euro, which is the company s functional and presentational currency. 16

17 (b) Business transactions and balances Transactions denominated in foreign currencies are converted into the functional currency using the exchange rates on the date of the transactions or, if the items have been revalued, using the exchange rates on the valuation dates. Exchange gains and losses from payments related to business transactions and converting assets and debts denominated in a foreign currency into the exchange rate on the date of the financial statements are entered in the income statement, except in the case of hedging of cash flow or net investment complying with the terms and conditions, which are entered into equity. Exchange gains and losses related to debts and cash and cash equivalents are presented in the income statement item financial income or expenses. All other exchange gains and losses are presented in the income statement item Other operating expenses. Changes in the fair value of monetary securities, denominated in a foreign currency and classified as available for sale, are divided into exchange rate differences due to changes in the deferred acquisition cost of the security and other changes in the book value. Exchange rate differences related to changes in the deferred acquisition cost are recognised through profit and loss, and other changes in the book value are entered in equity. Exchange rate differences of non-monetary assets and debts, such as shares recognised at fair value through profit and loss, are recognised in the income statement as part of gain or loss from the change of fair value. Exchange rate differences from non-monetary shares classified as available-forsale are entered in the available-for-sale investment fund in equity. (c) Group companies The income statements and balance sheets of Group companies (none of which operate in a hyperinflation country) using a functional currency different from the presentation currency of the Group are converted to the presentation currency as follows: a) the assets and debts of each balance sheet to be presented are converted into the exchange rate on the date of the balance sheet; b) the income and expense items of each income statement are converted into the average rates of the period (or the rates on the transaction dates if using the average rate does not produce a reasonable similar rate); c) all exchange rate differences generated by this are entered in the conversion differences of equity. Exchange rate differences generated by the conversion of net investments into foreign units and by loans and other currency instruments defined to hedge such net investments are entered in the exchange rate differences in equity when preparing the consolidated financial statements. When a foreign unit is partly transferred or when it is sold, exchange rate differences entered in equity are recognised in the income statement as part of capital gain/loss. Property, plant & equipment Property, plant and equipment are measured at the original acquisition cost, less deduction for depreciation and impairment. The acquisition cost contains costs immediately resulting from the acquisition. Costs arising later are only included in the asset s book value or recognised as a separate asset if it is probable that the future economic benefit associated with the asset will benefit the Group and the asset s acquisition cost can be reliably determined. Other repair and maintenance costs are recognised through profit and loss for the period in which they were realised. The residual values of assets and economic service lives are verified at a minimum annually on the date of the financial statements. 17

18 Assets are subjected to straight-line depreciation over the following estimated useful lives: Buildings Machinery and equipment Land areas Roads and ditches 7 20 years 3 5 years No depreciation 10 years Intangible assets The Group s intangible assets are computer software. Computer software is measured at acquisition cost, less deduction for recognised depreciation and amortisation expenses and impairment. They are depreciated over the estimated useful life of 5 10 years. Impairment of tangible and intangible assets The Group assesses whether there is any indication that an asset has been impaired at each financial statements date. If any such indication exists, the recoverable amount of the said asset is estimated. The recoverable amount is also estimated annually for the following assets, regardless of whether or not there are signs of impairment: goodwill, intangible assets with an unlimited useful life, and unfinished intangible assets. The need for impairment is assessed at the level of cashgenerating units, i.e. the lowest individual unit level that is mainly independent of the other units and whose cash flows can be separated from other cash flows. The recoverable amount is the higher of the asset s fair value less costs to sell and its value in use. Value in use is the estimated future net cash flows, discounted to their present value, expected to be derived from the said asset or cash-generating unit. The discount rate used is the interest rate before tax that represents the market s view of the time value of money and special risks associated with the asset. An impairment loss is recognised if the carrying amount of the asset is higher than its recoverable amount. The impairment loss is immediately recognised in the income statement. In connection with the recognition of the impairment loss, the useful life of the depreciated asset is re-evaluated. An impairment loss recognised for an asset is reversed if a change has taken place in the estimates used to determine the recoverable amount of the asset. However, the maximum reversal of an impairment loss amounts to the carrying amount of the asset had no impairment loss been recognised. Biological assets Biological assets, such as, in the Group s case, growing stock, are recorded on the balance sheet at their market value. Group forests are thus measured at fair value less estimated point-of-sale costs at harvest, there being a presumption that fair values can be reliably measured for these assets. The value of the Group s forest property is based on the discounted cash flow model. The fair value of biological assets is calculated on the basis of future cash flows from continuing operations, i.e. based on sustainable forest management and taking growth potential into consideration. The Group estimates that the turnover cycle of forest is 70 years in Finland, 80 in Estonia and 120 in Romania, and these figures are used as the bases for the cash flows. Annual felling in line with the long-term felling plan based on the forecast tree growth is multiplied by the prices forecast by an external assessor for each wood type and felling method for the corresponding period. The long-term felling plan is based on forest inventories prepared by the Finnish Forest Research Institute and revised at regular intervals. The development of wood prices after the prediction period given by an external assessor (10 years) is assumed to be ±0. The fair value of the biological asset is measured as the present value of the harvest from one growth cycle based on the productive forest land, taking into consideration environmental restrictions and other reservations. 18

19 The discount rate used in the valuation is determined using the weighted average cost of capital (WACC), in which case the required rate of return on equity is based on the use of the capital asset pricing model. The Group verifies its discount rate in accordance with a pre-defined calculation template, but the discount rate is modified only when an essential change that is classified as long-term takes place in an individual interest rate component. Biological assets that are physically attached to soil are recognised and measured at their fair value separately from the land. When acquiring biological assets, they are valued at the acquisition cost corresponding to the fair value. Leases Group as the leaseholder Leases where the risks and rewards typical of ownership remain with the lessor are classified as other leases. Leases paid on the basis of other leases are recognised in the income statement as expenses over the term of the lease in equal-sized instalments. Group as the lessor Assets leased with agreements other than finance leases are included in the property, plant and equipment in the balance sheet. The property items leased out by the company are land areas and are not subject to depreciation. Lease income is recognised in the income statement as equal instalments over the term of the lease. Inventories Inventories are measured at the acquisition cost or the lower net realisable value. Acquisition cost is determined using the weighted average price method. The acquisition cost includes the immediate purchasing costs less VAT. Net realisable value is the estimated selling price obtained in the ordinary course of business, from which the cost of the sale is deducted. Inventories include the wood raw material for available-for-sale biofuel, and seedlings and seeds. The Group will transfer land areas to inventories which have an approved building plan and the land areas are on the external sales list. In the case of land areas, these items are transferred to inventories when the building plan is ratified or the land areas are transferred to the external sales list. Accounts receivable Accounts receivable are initially recognised at fair value and later measured at deferred acquisition cost using the effective interest rate method less any impairment. Impairment loss is recognised when the company has objective evidence of the impairment. The amount of the impairment loss is the difference between the book value of the receivables and the amount recoverable from them, and corresponds to the present value of expected future cash flows. Financial assets and financial liabilities Financial assets The Group s financial assets are divided into the following categories: financial assets recognised at fair value through profit and loss, loans and other receivables, and available-for-sale financial assets. The classification is carried out based on the purpose of the acquisition of the financial assets and the assets are classified when they are first acquired. 19

20 Financial assets recognised through profit and loss at fair value are held for trading. An item belonging to financial assets is classified in this category if it has primarily been acquired for sale in the near future. Derivatives are also held for trading unless they have been defined as hedges. Asset items belonging to this group are short-term assets, unless they mature more than 12 months after the end of the reporting period. The Group s items are measured at fair value. Realised and unrealised profits and losses resulting from changes in fair value are recognised in the income statement for the accounting period during which they are created. Loans and other receivables are non-derivative assets that are connected to fixed or determinable payments and are not quoted on a functioning market and the Group does not hold them for trading purposes. Their valuation principle is deferred acquisition cost. In the balance sheet, they are included in the accounts receivable and other receivables under short-term or long-term assets according to their nature. They are placed in the latter category if they mature in more than 12 months. Available-for-sale financial assets are non-derivative assets that have been expressly determined to be in this category or that have not been classified into any other category. They are included in noncurrent assets unless the intention is to hold them for less than 12 months after the date of the financial statements, in which case they are included in short-term assets. Available-for-sale financial assets can include both shares and interest-bearing investments. They are measured at fair value or, if fair value cannot be reliably determined, at acquisition price. Changes in the value of available-for-sale financial assets are recognised in the fair value reserve, taking into consideration the tax effect of equity. Changes in fair value are transferred from equity to the income statement when the investment is sold or when its value has decreased so that an impairment loss must be recognised for the investment. Transaction costs are included in the original book value of financial assets when an item is not measured at fair value through profit and loss. All purchases and sales of financial assets are recognised on the trade date. De-recognition of financial assets from the balance sheet occurs when the Group has lost its contractual right to cash flows or when it has transferred risks and income outside the Group to a significant degree. Financial liabilities Financial liabilities are originally recognised in accounting at fair value. Transaction costs are included in the original book value of financial liabilities. Financial liabilities used later for fair value hedging are recognised by taking into account the change in the fair value of the hedged item, and other financial liabilities are recognised at deferred acquisition cost using the effective interest rate method. Financial liabilities are included in short-term and long-term liabilities. Borrowing costs Borrowing costs are recognised as expenses for the accounting period during which they were incurred. Impairment of financial assets On every financial statements date the Group evaluates whether there is objective evidence of the impairment of a single financial asset line item or the impairment of a financial asset category. If the fair value of share investments falls short of acquisition cost to a significant degree and for a period of time defined by the Group, this is an indication of the impairment of the available-for-sale share. If 20

21 there is evidence of impairment, the loss accrued in the fair value reserve is transferred to the income statement. An impairment loss from equity investments classified as available-for-sale financial assets is not reversed through the income statement, whereas the later reversal of an impairment loss from interest-bearing instruments is recognised through profit and loss. The Group recognises an impairment loss on accounts receivable when there is objective evidence that the receivables cannot be collected in full. Significant financial problems by the debtor, the likelihood of bankruptcy or neglect of payments are evidence of the impairment of accounts receivable. The size of the impairment loss recognised in the income statement is determined by the difference between the book value of the receivables and the present value of estimated deferred cash flows discounted by the effective interest rate. If the size of the impairment loss decreases during a later accounting period and the reduction can be objectively considered to be connected to an event after the recognition of the impairment, the recognised loss is reversed through profit or loss. Derivatives contracts and hedge accounting Derivatives contracts are originally recognised in accounting at fair value on the date on which the Group becomes a contracting party, and later they are also measured at fair value. Profits and losses that result from measurement at fair value are handled in accounting in a way determined by the purpose of the derivatives contract. Changes in the value of derivatives contracts to which hedging accounting is applied, and that are effective hedging instruments, are presented congruently with the hedged line item in the income statement. When derivatives contracts are concluded, the Group treats them as hedges of the estimated highly probable cash flow from operations, fair value hedges or derivatives contracts that do not satisfy the criteria of hedging accounting. The Group documents hedge accounting when it initiates the relationship between the target to be hedged and the hedging instruments, together with the Group s risk management objectives and the strategy for undertaking hedging. When starting hedging, and at least at the time of the release of each set of financial statements, the Group documents and evaluates the effectiveness of the hedging relations by examining the ability of the hedging instrument to protect against changes in cash flow or the fair value of the line item being hedged. Changes in the fair value of derivatives that meet the terms of fair value hedging are recognised through profit and loss to adjust interest and financing costs in the income statement. Correspondingly, the change in the fair value of the hedged item is entered in the income statement. A change in the fair value of the effective portion of derivative instruments that satisfy the conditions for hedging cash flow are recognised directly in the hedging fund contained in the equity revaluation reserve. Profits and losses recognised in equity are transferred to the income statement in the accounting period for which the hedged line item is recognised in the income statement. When the Group applies cash flow hedging to hedge against the interest risk of floating rate loans, the ineffective portion of the hedging relationship is entered to adjust the interest expenses of the income statement. When a hedging instrument acquired to hedge cash flow matures or is sold, or when the criteria of hedging accounting are no longer satisfied, the profit or loss accrued from the hedging instrument remains in equity until the forecast interest cash flow is realised. Nevertheless, if the forecast hedged transaction is no longer expected to be implemented, the profit or loss accrued in equity is immediately recognised in the income statement. If the maturity of the hedged line item is over 12 months, the fair values of derivatives in hedge accounting are presented in non-current assets or debts in the balance sheet; otherwise, they are included in short-term assets or liabilities. 21