UPM increases the fair value of its forest assets in Finland and changes the accounting policy of forest renewal costs
Higher forest growth increases the fair value of forests.
UPM increases the IFRS fair value of its forest assets in Finland, mainly due to higher forest growth estimates. In addition, the company adjusts its long-term wood price estimates slightly. The impact of these changes on the fair value of forest assets is approximately EUR 320 million and will be reported as an item affecting comparability in Q4 2018 under Other operations.
The updated forest growth model indicates higher forest growth volumes that are explained mainly by sustainable forest management.
“UPM’s own forests are strategic source for UPM’s wood supply. Active, timely and sustainable forest management combined with high quality seedling material have increased UPM’s own forests’ growth significantly over the years. Increasing forest growth and carbon sequestration enable higher sustainable harvesting volumes from UPM’s own forests now and in the future,” says Sauli Brander, Senior Vice President, Wood Sourcing and Forestry Northern Europe.
UPM continues to estimate a declining trend of real wood prices in Finland with a slightly slower rate than previously. The pre-tax discount rate used to determine the fair value of the Finnish forests remains at 7.0%.
There is no significant change in the fair value of Uruguayan plantations. The pre-tax discount rate used to determine the fair value of the plantations increases from 9.5% to 9.9%.
Accounting policy change of forest renewal costs due to higher share of Southern hemisphere plantations
From 1 January 2019, UPM will change its accounting policy relating to forest assets by capitalising forestry renewal costs on the balance sheet during the growth cycle and reclassifying forest assets-related cash flows from operating cash flow to investing cash flow. Currently UPM recognises forestry renewal costs in income statement and reports forest assets-related cash flows, including forest renewal costs, forest asset purchases and sales, in operating cash flow.
UPM has consistently increased the weight of the Southern hemisphere plantations in its forest asset portfolio, where the growth cycle is significantly shorter and significance of forestry renewal cost substantially higher compared to the Northern hemisphere. Majority of UPM’s forest renewal costs are related to Southern hemisphere plantations. Thus, the change of accounting policy results in more relevant information on group’s financial performance and cash flows.