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1. Segment information
The business of Wärtsilä consists of one business area, the Power Business. The Power Business is subdivided into two mutually supportive market areas, Marine Solutions and Energy Solutions. These offer customers the same product concept modified for specific applications. The main products for both these markets are gas and diesel engines and related services. The market areas are highly dependent on each other.
In the Power Business, the design-related research and development and manufacturing required for the engines sold to both markets take place in the same R&D centres and factories. The manufacturing process is the same for each market. Similarly, the same Group companies are responsible for the distribution of these products and the services related to them. Capacity costs cannot be reliably allocated to the two different markets. These costs are significant and vary between the two units in different years. Customers in both markets are capital-intensive corporations with global operations. The development of the two market areas is strongly linked to global economic trends.
As geographical information, Wärtsilä reports the geographical areas Finland, other European countries, Asia, the Americas and other continents. In the geographical information net sales is split by the customer’s destination and non-current assets by origin.
Geographical information
2016 2015
MEUR Net sales Non-current
assets*
Net sales Non-current
assets*
Finland 121 264 109 284
Other European countries 1 460 1 388 1 457 1 462
Asia 1 774 134 2 051 143
The Americas 1 039 131 1 006 89
Other 407 6 407 6
Total 4 801 1 923 5 029 1 984
* Non-current assets consist of goodwill, intangible assets, property, plant and equipment, investment properties and investments in associates and joint ventures.
Business area information
Internal management reporting is used to monitor the development of operations on the basis of market-based business areas. Reporting serves internal goal setting and strategic follow up, and is thus a management tool rather than an actual external economic indicator.
Wärtsilä’s highest operative decision maker (CODM, Chief Operating Decision Maker) is the President and CEO with the support of the Board of Management, and in some cases, the Board of Directors. The President and CEO assesses the Group’s financial position and its development as a whole, not based on the results of the business areas. As the Group’s level of integration is high, the reported indicators from business areas do not give a true picture of the business areas’ financial position and development.
Against this background, Wärtsilä’s business cannot be divided into separate operating segments with individual reporting.
During the financial period 1 January–31 December 2016 and 1 January–31 December 2015, Wärtsilä did not have any individual significant customers or countries.
Net sales
MEUR 2016 2015
Energy Solutions 943 1 126
Marine Solutions 1 667 1 720
Services 2 190 2 184
Total 4 801 5 029
2. Acquisitions
Acquisitions 2016
American Hydro Corporation
On 30 June 2016, Wärtsilä acquired a USA- and Canada-based company, American Hydro Corporation, from the Weir Group plc.
American Hydro is a leading supplier and installer of large equipment upgrades and servicing for the hydroelectric and water distribution industries, specialising in consultancy, design and precision performance enhancements for hydro-turbines and pumps. This acquisition will enable Wärtsilä to grow and expand its existing global Hydro and Industrial service offering.
The following tables summarise the preliminary amounts for the consideration paid for American Hydro, the cash flow from the acquisition, and the amounts of the assets acquired and liabilities assumed recognised at the acquisition date.
Preliminary consideration MEUR
Consideration transferred 46
Total consideration transferred 46
Preliminary cash flow from the acquisition MEUR
Consideration paid in cash 45
Contingent consideration 1
Cash and cash equivalents of the acquired companies -4
Total cash flow from the acquisition 42
Provisional values of the assets and liabilities arising from the acquisition MEUR
Intangible assets 5
Property, plant and equipment 14
Inventories 1
Trade and other receivables 8
Cash and cash equivalents 4
Total assets 33
Provisions 1
Trade payables and other liabilities 7
Total liabilities 8
Total net assets 24
Preliminary goodwill 22
The preliminary fair values of acquired identifiable intangible assets at the date of acquisition (including customer relationships and order book) amounted to EUR 5 million. The fair value of current trade receivables and other receivables is approximately EUR 8 million. The fair value of trade receivables does not include any significant risk.
The preliminary goodwill of EUR 22 million reflects the value of know-how and expertise in hydroelectric and water distribution industries. Wärtsilä foresees that the acquisition will strengthen its presence in hydro and industrial services as well as support the growth strategy and expansion in renewables, improving Wärtsilä's offering and services towards customers. The goodwill recognised for American Hydro is expected to be mainly tax deductible.
During 2016, the Group incurred acquisition-related costs of EUR 1 million related to external legal fees and due diligence costs. The costs have been included in the other operating expenses in the consolidated statement of income.
Eniram Group
On 30 June 2016, Wärtsilä signed an agreement to acquire Eniram, a Finland-based technology company providing the marine industry with energy management and analytics solutions. Ownership of the company transferred to Wärtsilä with effect from 1 July 2016.
Eniram provides the maritime industry with energy management technology to reduce fuel consumption and emissions. Eniram’s solutions range from single onboard applications for trim, speed and engine optimisation to comprehensive fleet analysis. The company’s solutions are installed in over 270 vessels; saving fuel, increasing profitability and reducing harmful emissions. Eniram is headquartered in Helsinki, Finland and has subsidiaries in the UK, the USA, Germany and Singapore. The acquisition of Eniram will enable Wärtsilä to grow and strengthen its existing digital offering and in-house capabilities, specifically in data analytics, modelling and performance optimisation.
The following tables summarise the preliminary amounts for the consideration paid for Eniram Group, the cash flow from the acquisition, and the amounts of the assets acquired and liabilities assumed recognised at the acquisition date.
Preliminary consideration MEUR
Consideration transferred 41
Total consideration transferred 41
Preliminary cash flow from the acquisition MEUR
Consideration paid in cash 41
Cash and cash equivalents of the acquired companies -1
Total cash flow from the acquisition 40
Provisional values of the assets and liabilities arising from the acquisition MEUR
Intangible assets 11
Trade and other receivables 3
Cash and cash equivalents 1
Total assets 14
Provisions 2
Trade payables and other liabilities 4
Deferred tax liabilities 2
Total liabilities 8
Total net assets 7
Preliminary goodwill 34
The preliminary fair values of acquired identifiable intangible assets at the date of acquisition (including technology) amounted to EUR 11 million. The fair value of current trade receivables and other receivables is approximately EUR 3 million. The fair value of trade receivables does not include any significant risk.
The preliminary goodwill of EUR 34 million reflects the value of know-how and expertise in energy management technology. Wärtsilä foresees that the acquisition will enable customers to optimise their assets and improve predictability, as well as support them with real-time analytics. Through this acquisition Wärtsilä takes a solid lead in marine digitalisation.
During 2016 the Group incurred acquisition-related costs of EUR 1 million related to external legal fees and due diligence costs. The costs have been included in the other operating expenses in the consolidated statement of income.
Pro forma
If the acquisitions had occurred on 1 January 2016, management estimates that consolidated net sales would have been EUR 4,826 million. The impact in the consolidated operating result would not have been significant. In determining these amounts, management has assumed that the fair value adjustments, which arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January 2016.
Acquisitions 2015
L-3 Marine Systems International
On 31 May 2015, Wärtsilä acquired L-3 Marine Systems International (MSI) from NYSE-listed L-3 Communications Holdings Inc. The total consideration of the transaction was EUR 293 million.
MSI has extensive experience in supplying automation, navigation and electrical systems, dynamic positioning technology, as well as sonar and underwater communications technology for a variety of vessel types and offshore installations. Wärtsilä’s strong position in the development of technologies that enhance operational efficiency will be further strengthened with the addition of MSI’s broad range of capabilities.
The following tables summarise the consideration paid for MSI, the cash flow from the acquisition, and the amounts of the assets acquired and liabilities assumed recognised at the acquisition date.
Total consideration MEUR
Consideration transferred 293
Total consideration transferred 293
Cash flow from the acquisition MEUR
Consideration paid in cash 293
Cash and cash equivalents of the acquired companies -36
Total cash flow from the acquisition 258
The assets and liabilities arising from the acquisition at fair value MEUR
Intangible assets 132
Property, plant and equipment 8
Inventories 129
Trade and other receivables 70
Deferred tax assets 23
Cash and cash equivalents 36
Total assets 398
Provisions 19
Pension obligations 65
Trade payables and other liabilities 146
Deferred tax liabilities 46
Total liabilities 277
Total net assets 121
Goodwill 172
The fair values of acquired identifiable intangible assets at the date of acquisition (including technology, customer relationships and trademarks) amounted to EUR 132 million. The fair value of current trade receivables and other receivables is approximately EUR 70 million. The fair value of trade receivables does not include any significant risk.
The goodwill of EUR 172 million reflects the value of know-how and expertise in marine electrical & automation. Wärtsilä foresees that the new unit will capture new market opportunities and improve the operational efficiency of its customers. The goodwill recognised for MSI is not tax deductible.
During 2015, the Group incurred acquisition-related costs of EUR 2 million related to external legal fees and due diligence costs. The costs have been included in the other operating expenses in the consolidated statement of income. The total acquisition-related costs were EUR 4 million.
Pro forma
During June-December 2015, MSI contributed EUR 264 million to order intake and EUR 263 million to net sales. Contribution to the operating result of the Group was EUR 14 million. If the acquisition had occurred on 1 January 2015, management estimates that consolidated net sales would have been EUR 5,197 million. The impact in the consolidated operating result would not have been significant. In determining these amounts, management has assumed that the fair value adjustments, which arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January 2015.
3. Disposals
Disposals 2016
On 30 June 2016, Wärtsilä sold its majority interest in Wärtsilä Ship Design Serbia doo to the operative management of the company. The consideration received and the impact on net profit for the financial period were not significant.
On 31 October 2016, Wärtsilä divested its power drives business to Finland-based The Switch. The consideration paid and the impact on net profit for the financial period were not significant.
Disposals 2015
Wärtsilä sold the two-stroke engine business to the joint venture Winterthur Gas & Diesel Ltd (WinGD) in January 2015. Until that, the two-stroke business was classified as discontinued operation, including the transfer of non-current assets held for sale and liabilities directly attributable to them on separate rows in the statement of financial position. As a result of the sale transaction, a profit of EUR 24 million was recognised in profit for the financial period from the discontinued operations.
Profit for the financial period from the discontinued operations
MEUR 2015
Discontinued operations
Expenses -2
Total -2
Profit on sale of shares 24
Operating result 22
Profit for the financial period 22
Earnings per share, discontinued operations, EUR 0.11
Cash flows from the discontinued operations
MEUR 2015
Cash flow from investing activities 44
Total 44
4. Long-term construction contracts and operating and maintenance agreements
MEUR 2016 2015
Net sales recognised for the financial period
From long-term construction contracts 813 940
From long-term operating and maintenance agreements 331 355
Long-term construction contracts in progress
Aggregated amount of costs incurred and recognised profits 2 213 2 229
Advances received at 31 December 1 965 2 011
Receivables from the revenue recognition netted with the advances received at 31 December 249 218
Revenue from long-term construction contracts and long-term operating and maintenance agreements is recognised in accordance with the percentage of completion method. The percentage of completion is usually based on the ratio of costs incurred to total estimated costs to date for long-term construction contracts. In some gas solution projects where the key value drivers are engineering, procurement and project management, and where the manufacturing is outsourced, the percentage of completion is assessed with reference to surveys of work performed. For long-term operating and maintenance agreements the percentage of completion is calculated on the basis of the proportion of the contracted services performed.
5. Other operating income
MEUR 2016 2015
Capital gains 7 4
Government grants 8 10
Sale of scrapped material 3 4
Income related to cancelled orders* 9 4
Insurance indemnities 7 5
Other 21 25
Total 55 51
* Expenses related to cancelled orders are recorded on respective expense accounts.
6. Material and services
MEUR 2016 2015
Purchases during the financial period -1 207 -1 406
Change in inventories -27 -11
External services -1 119 -1 186
Total -2 353 -2 603

   

7. Employee benefit expenses
MEUR 2016 2015
Wages and salaries 939 935
Pension costs
Defined benefit plans 10 12
Defined contribution plans 63 65
Other compulsory personnel costs 147 148
Total 1 159 1 159
Management remuneration is specified in Note 29. Related party disclosures.
Long-term incentive schemes
Wages and salaries include a provision for expenses arising from bonus schemes 2013, 2014 and 2015, totalling EUR 5 million (15). These bonus schemes are tied to the price development of the Company’s share during a pre-determined timeframe, and an upper limit is set for the bonus.
The bonus payment for bonus schemes is based on the share price development during a three-year period. The 2013 bonus scheme comprises 1,755,000 bonus rights, the 2014 bonus scheme 2,076,000 bonus rights and the 2015 bonus scheme 1,962,000 bonus rights. For the bonus scheme 2013 the basis of a share price is EUR 37.05, for the bonus scheme 2014 EUR 44.25 and for the bonus scheme 2015 EUR 47.47. The 2013 bonus scheme takes into account 50% of dividends paid, and the paid bonus cannot exceed EUR 10.00 per bonus right. The 2014 and 2015 bonus schemes take into account 100% of dividends paid, and the paid bonus cannot exceed EUR 10.60 per bonus right in the 2014 bonus scheme or EUR 13.84 in the 2015 bonus scheme.
2016 2015
Personnel on average 18 332 18 565
Personnel at the end of the financial period 18 011 18 856
8. Depreciation, amortisation and impairment
MEUR 2016 2015
Intangible rights 9 9
Purchase price allocation amortisation 35 32
Other intangible assets 15 20
Buildings and structures 15 15
Machinery and equipment 46 47
Other tangible assets 1 1
Impairments 17
Total 138 124
9. Measures of profit and items affecting comparability
MEUR 2016 2015
Comparable adjusted EBITA 618 643
Purchase price allocation amortisation -35 -32
Comparable operating result 583 612
Items affecting comparability:
Social plan costs -22 -16
Impairment and write-downs -22 -1
Other costs -7 -8
Items affecting comparability, total -51 -25
Operating result 532 587
In 2016, items affecting comparability amounted to EUR 51 million (25), of which EUR 48 million (19) related to restructuring costs, and EUR 3 million (6) to other costs.
10. Financial income and expenses
MEUR 2016 2015
Interest income on loans and receivables 2 2
Interest income on financial assets at fair value through the statement of income 5 7
Exchange rate differences* 8
Other financial income 4 3
Total financial income 19 11
Interest expenses on financial liabilities recognised at amortised cost -13 -13
Interest expenses on financial liabilities at fair value through the statement of income -11 -9
Net interest from defined benefit plans -3 -3
Write-down of financial receivables -36
Exchange rate differences* -12
Other financial expenses -8 -8
Total financial expenses -72 -45
Total -53 -34
* In 2016, the result from the ineffective portion of cash flow hedges related to cancelled orders, EUR -8 million (-1) and exchange rate differences from unhedged internal loans, EUR 14 million (-15) were included in exchange rate differences in the consolidated statement of income.
11. Income taxes
MEUR 2016 2015
Income taxes
for the financial period -121 -127
for prior financial periods -1
Change in deferred tax
origination and reversal of temporary differences -1 3
Total -123 -124
Reconciliation of effective tax rate:
Profit before taxes 479 553
Tax calculated at the domestic corporate tax rate 20.0% -96 -111
Effect of changed tax rates -3 -1
Effect of different tax rates in foreign subsidiaries 2 5
Effect of income not subject to tax and non-deductible expenses -7 -2
Effect of share of result of associates and joint ventures 3 3
Utilisation of previously unrecognised tax losses carried forward 1 7
Unrecognised taxes on losses carried forward -6 -21
Other taxes* -12 -11
Other temporary differences -4 8
Income taxes for prior financial periods -1
Tax charge in the consolidated statement of income -123 -124
Effective tax rate (%) 25.6 22.5
* Other taxes consist mainly of witholding taxes not utilised and taxes not related to income.
Income taxes related to other comprehensive income are presented in Consolidated statement of comprehensive income. Changes in deferred tax assets and liabilities are presented in Note 21. Deferred taxes.
Wärtsilä is subject to tax audits in some countries, which can result in tax reassessment decisions and obligations to pay additional taxes and related payments.
12. Earnings per share
Earnings per share is calculated by dividing the net profit for the financial period attributable to equity holders of the parent company by the weighted average number of shares outstanding. During the financial periods there were no programmes with dilutive effect.
MEUR 2016 2015
Net profit for the financial period attributable to equity holders of the parent company 352 444
Thousands of shares
weighted average number of shares outstanding* 197 241 197 241
Earnings per share attributable to equity holders of the parent company (basic and diluted):
Earnings per share, continuing operations, EUR 1.79 2.14
Earnings per share, discontinued operations, EUR 0.11
Earnings per share (EPS), basic and diluted, EUR 1.79 2.25
* Additional information on the number of shares is presented in Note 23. Equity.
13. Intangible assets
Impairment testing of goodwill
Goodwill from acquisitions is allocated to the Group’s cash-generating units (CGUs). CGUs are the lowest level of assets for which there are separately identifiable cash flows. Currently Wärtsilä identifies 3 (2) separate independent cash inflow CGUs to which goodwill can directly be linked as per the below table.
Cash-generating units
Goodwill
MEUR 2016 2015
Marine Systems International 172
American Hydro 23
Eniram 34
Power Business, other 1 056 931
Total 1 112 1 103
The recoverable amounts from the CGUs are determined based on value-in-use calculations. The calculations are made on a discounted cash flow method basis, derived from the order book and five-year cash flow projections from management approved strategic plans. The estimated cash flows of CGUs are based on utilisation of the existing property, plant and equipment in their current condition with normal maintenance capital expenditure, excluding any potential future acquisitions. Cash flows beyond the five-year period are calculated using the terminal value method. The terminal growth rate used in projections is based on management’s assessment on conservative long-term growth. The terminal growth rate used is 2%.
The key driver for the valuation is the growth in the global economy and in particular the development of the global power market, the global shipbuilding industry and the demand for related services. The projected development of total costs in the market affects the profitability, whereas no single cost item is considered to have a material impact. The valuation driver for the new equipment sales is the growth in the global economy, whereas for after sales the drivers are also the demand for related services and the projected development in labour cost.
The applied discount rate is the weighted average pre-tax cost of capital (WACC) as defined by Wärtsilä. The components of the WACC are risk-free rate, market risk premium, industry specific beta, cost of debt and debt equity ratio. When defining the WACC for 2016, it has been considered that the general interest rate is currently on a lower level. Wärtsilä has used a WACC of 9.6% (8.9) in the calculations.
As a result of the impairment test, no impairment losses for the CGUs were recognised for the financial periods ended 31 December 2016 and 2015 respectively. The recoverable amounts from all CGUs exceeded their carrying values remarkably.
Sensitivity analysis
Sensitivity analyses have been carried out for the valuation of the recoverable amounts for the CGUs by changing the assumptions used in the calculations. A change in an assumption that would cause the recoverable amount to equal the carrying amount is presented in the table below.
Change
Pre-tax discount rate:
American Hydro increase more than 3 percentage points
Eniram increase more than 3 percentage points
Power Business, other increase more than 18 percentage points
Terminal growth rate:
American Hydro decrease more than 5 percentage points
Eniram decrease more than 4 percentage points
Power Business, other decrease more than 90 percentage points
Profitability:
American Hydro decrease more than 25 percentage
Eniram decrease more than 40 percentage
Power Business, other decrease more than 60 percentage
In management’s opinion, the changes in the basic assumptions shall not be seen as an indication that these factors are likely to materialise. The sensitivity analyses are hypothetical and should therefore be treated with caution.
2016
MEUR Develop-
ment
expenses
Construc-
tion in
progress
and
advances
paid
Other
intangible
assets
Goodwill Total
Cost on 1 January 2016 114 33 730 1 108 1 986
Changes in exchange rates 1 -15 -46 -60
Acquisitions 16 55 71
Additions 11 5 16
Disposals -8 1 -8
Reclassifications -3 5 2
Cost on 31 December 2016 107 41 743 1 118 2 008
Accumulated amortisation and impairment on 1 January 2016 -66 -450 -5 -522
Changes in exchange rates 8 8
Accumulated amortisation on disposals and other changes 4 -2 2
Amortisation during the financial period -9 -50 -59
Impairments -3 -3
Accumulated amortisation and impairment on 31 December 2016 -73 -495 -5 -574
Carrying amount on 31 December 2016 33 41 248 1 112 1 434
Development costs for internally generated assets capitalised during the financial period amounted to EUR 6 million (6). The carrying amount was EUR 68 million (80).

Purchase price allocation amortisation amounted to EUR 35 million (32) and the carrying amount was EUR 209 million (236).
2015
MEUR Develop-
ment
expenses
Construc-
tion in
progress
and
advances
paid
Other
intangible
assets
Goodwill Total
Cost on 1 January 2015 84 55 607 914 1 658
Changes in exchange rates 3 2 5 21 31
Acquisitions 132 172 304
Additions 1 8 6 14
Disposals -20 -21
Reclassifications 27 -31 1 -1
Cost on 31 December 2015 114 33 730 1 108 1 986
Accumulated amortisation and impairment on 1 January 2015 -55 -421 -5 -479
Changes in exchange rates -2 -2
Accumulated amortisation on disposals and other changes -2 22 20
Amortisation during the financial period -9 -51 -60
Accumulated amortisation and impairment on 31 December 2015 -66 -450 -5 -522
Carrying amount on 31 December 2015 48 33 280 1 103 1 464

      

14. Property, plant & equipment
2016
MEUR Land
and
water
Build-
ings
and
struc-
tures
Machin-
ery and
equip-
ment
Construc-
tion in
progress
and
advances
paid
Other
tangible
assets
Invest-
ment
proper-
ties
Total
Cost on 1 January 2016 32 343 800 33 24 13 1 246
Changes in exchange rates 5 7 13
Acquisitions 1 6 6 14
Additions 3 28 7 38
Disposals -9 -28 -1 -38
Reclassifications 23 -29 -5
Cost on 31 December 2016 34 349 834 12 25 12 1 266
Accumulated depreciation and impairment on 1 January 2016 -1 -162 -630 -20 -815
Changes in exchange rates -2 -5 -8
Accumulated depreciation on disposals 8 26 33
Depreciation during the financial period -15 -46 -1 -62
Impairments -8 -6 -14
Reclassifications 1 1 4
Accumulated depreciation and impairment on 31 December 2016 -1 -179 -660 -21 -861
Carrying amount on 31 December 2016 33 170 174 12 4 12 405
Value of finance-leased assets included in carrying amount 1
Investment properties include land areas not used by the Group. Their estimated fair value is around EUR 21 million (23). During the financial period, investment properties were sold totalling EUR 1 million (1) generating a gain of EUR 1 million (1).
2015
MEUR Land
and
water
Build-
ings
and
struc-
tures
Machin-
ery and
equip-
ment
Construc-
tion in
progress
and
advances
paid
Other
tangible
assets
Invest-
ment
proper-
ties
Total
Cost on 1 January 2015 26 319 806 53 27 14 1 247
Changes in exchange rates 1 7 -2 7
Acquisitions 1 5 8
Additions 11 29 25 65
Disposals 1 -17 -49 -1 -1 -67
Reclassifications 4 27 2 -42 -2 -12
Cost on 31 December 2015 32 343 800 33 24 13 1 246
Accumulated depreciation and impairment on 1 January 2015 -1 -159 -630 -23 -813
Changes in exchange rates -3 -4 -7
Accumulated depreciation on disposals 13 45 1 58
Depreciation during the financial period -15 -47 -1 -63
Reclassifications 2 6 1 10
Accumulated depreciation and impairment on 31 December 2015 -1 -162 -630 -20 -815
Carrying amount on 31 December 2015 33 181 168 32 4 13 431
Value of finance-leased assets included in carrying amount 1 1
15. Investments in associates and joint ventures
MEUR 2016 2015
Carrying amount on 1 January 89 90
Investments 9 9
Share of result 14 17
Dividends -29 -32
Translation differences 1 3
Disposal of shares -1
Carrying amount on 31 December 84 89
In 2016, Wärtsilä invested EUR 9 million (9) in the joint venture CSSC Wärtsilä Engine (Shanghai) Co., Ltd and sold its 40% share in the China-based associated company Cosco-Shipyard Total Automation Co Ltd. The consideration received and the impact on net profit for the financial period were not significant.
Summary of financial information (100%):
2016
MEUR Holding % Assets Equity Liabilities Net
sales
Profit
for the
financial
period
Joint ventures
Wärtsilä Qiyao Diesel Company Ltd. China 50.0 30 21 9 19
Wärtsilä Hyundai Engine Co Ltd. South Korea 50.0 232 111 122 221 32
CSSC Wärtsilä Engine (Shanghai) Co., Ltd. China 49.0 52 32 20 -4
Repropel Sociedad de reparacao de helices Portugal 50.0 1 1 2
Associated companies
Wärtsilä Land & Sea Academy, Inc. Philippines 40.0 -2 2
Neptun Maritime AS Norway 40.0 1 1 1
CSSC Wärtsilä Engine (Shanghai) Co. Ltd factory is manufacturing medium and large bore medium speed diesel and dual-fuel engines at Lingang, Shanghai. Wärtsilä Hyundai Engine Co Ltd. manufactures Wärtsilä 50DF dual-fuel engines for LNG carriers and other marine application in Mokpo, South Korea.
2015
MEUR Holding % Assets Equity Liabilities Net
sales
Profit
for the
financial
period
Joint ventures
Wärtsilä Qiyao Diesel Company Ltd. China 50.0 34 24 10 25
Wärtsilä Hyundai Engine Co Ltd. South Korea 50.0 281 132 149 273 34
CSSC Wärtsilä Engine (Shanghai) Co., Ltd. China 49.0 19 19
Repropel Sociedad de reparacao de helices Portugal 50.0 2 1 1 1
Associated companies
Wärtsilä Land & Sea Academy, Inc. Philippines 40.0 -2 2
Cosco-Shipyard Total Automation Co Ltd. China 40.0 8 5 3 8
Neptun Maritime AS Norway 40.0 1 1 1
16. Available-for-sale financial assets
Available-for-sale financial assets include unlisted shares. The fair value cannot be reliably measured for the unlisted shares, so the investment is carried at cost.
MEUR 2016 2015
Carrying amount on 1 January 15 16
Disposal of shares -1
Carrying amount on 31 December 15 15
2016 2015
MEUR Cost Market value Cost Market value
Unlisted shares (level 3)
Other shares 15 15 15 15
Total shares 15 15 15 15
17. Inventories
MEUR 2016 2015
Materials and consumables 432 460
Work in progress 532 655
Finished products 36 41
Advances paid 42 44
Total 1 042 1 200
In 2016, EUR 17 million (22) impairment for obsolete inventories has been recognised in the consolidated statement of income. Acquisition-related increase in inventories is EUR 1 million (129).
18. Financial assets and liabilities by measurement category
2016
MEUR Cash flow
hedges
Financial
assets/
liabilities
at fair
value
through the
statement
of income
Loans and
receivables
Available-
for-sale
financial
assets
Financial
liabilities
measured
at
amortised
cost
Carrying
amounts
of the
statement
of financial
position
items
Fair
value
Non-current financial assets
Available-for-sale financial assets 15 15 15
Interest-bearing investments 6 6 6
Other receivables 6 6 6
Current financial assets
Trade receivables 1 220 1 220 1 220
Derivatives 9 9 9
Other receivables 10 10 10
Cash and cash equivalents 472 472 472
Carrying amount by category 9 10 1 704 15 1 738 1 738
Non-current financial liabilities
Interest-bearing debt 520 520 531
Current financial liabilities
Interest-bearing debt 108 108 108
Trade payables 502 502 502
Derivatives 31 13 45 45
Other liabilities 6 6 6
Carrying amount by category 31 13 1 136 1 181 1 192
2015
MEUR Cash flow
hedges
Financial
assets/
liabilities
at fair
value
through the
statement
of income
Loans and
receivables
Available-
for-sale
financial
assets
Financial
liabilities
measured
at
amortised
cost
Carrying
amounts
of the
statement
of financial
position
items
Fair
value
Non-current financial assets
Available-for-sale financial assets 15 15 15
Interest-bearing investments 17 17 17
Other receivables 28 28 28
Current financial assets
Trade receivables 1 394 1 394 1 394
Derivatives 9 9 9
Other receivables 11 11 11
Cash and cash equivalents 334 334 334
Carrying amount by category 9 11 1 772 15 1 807 1 807
Non-current financial liabilities
Interest-bearing debt 492 492 503
Current financial liabilities
Interest-bearing debt 232 232 232
Trade payables 510 510 510
Derivatives 28 4 32 32
Other liabilities 2 2 2
Carrying amount by category 28 4 1 236 1 268 1 279
Fair values of available-for-sale financial assets per hierarchies is presented in Note 16. Available-for-sale financial assets. Other financial assets and liabilities are included in level 2. Additional information on financial liabilities is presented in Note 25. Financial liabilities.
19. Other receivables
MEUR 2016 2015
Derivatives 9 9
Interest and other financial items 10 11
Insurance receivables 10 15
Rental accruals 5 8
Project accruals 10 14
Accruals from long-term contracts 295 172
Other accruals 47 39
Loan receivables 6 6
Defined benefit plans 1 1
VAT receivables 71 76
Other* 49 73
Total 512 424
Non-current 18 28
Current 494 396
* Includes payroll related tax receivables of EUR 11 million (8) in Brazil, which cannot be utilised within a year, and for comparison period 2015 also a receivable of EUR 21 million from the disposal of the two-stroke engine business.
20. Cash and cash equivalents
MEUR 2016 2015
Cash and bank balances* 450 311
Current deposits 22 22
Total 472 334
* EUR 132 million (147) of cash and bank balances was not immediately available to the parent company.
21. Deferred taxes
Changes in deferred taxes during 2016
MEUR 1 January 2016 Recognised
in the
consolidated
statement of
income
Other
compre-
hensive
income
Translation
differences
Acquisitions
and
disposals
31 December 2016
Deferred tax assets
Tax loss carry-forwards 26 -8 1 19
Pension obligations 23 -1 3 25
Provisions 32 1 32
Intragroup margin in inventories 10 -2 9
Fair value reserve 24 -11 1 12
Other temporary differences 42 1 1 44
Total 157 -9 -8 3 141
Deferred tax liabilities
Intangible assets and property, plant and equipment 64 -7 2 59
Fair value reserve 1 1
Other temporary differences 36 -1 35
Total 102 -8 2 93
Net deferred tax assets/liabilities 55 -1 -8 3 -2 48
On 31 December 2016, the Group had temporary differences on which no deferred tax assets were booked totalling EUR 45 million (47), as it is uncertain if they will be realised. Most of the unrecognised deferred tax assets are related to cumulative tax losses. Of these, EUR 12 million (17) will expire within the next five years and the rest will expire later or never. The cumulative tax losses on which deferred tax assets have been booked will never expire.
Changes in deferred taxes during 2015
MEUR 1 January 2015 Recognised
in the
consolidated
statement of
income
Other
compre-
hensive
income
Translation
differences
Acquisitions
and
disposals
31 December 2015
Deferred tax assets
Tax loss carry-forwards 27 -4 -1 2 24
Pension obligations 23 -1 -2 1 6 28
Provisions 27 -5 3 26
Intragroup margin in inventories 9 10
Fair value reserve 24 -1 24
Other temporary differences 35 -3 2 14 46
Total 144 -12 -2 2 23 157
Deferred tax liabilities
Intangible assets and property, plant and equipment 30 -10 2 42 65
Fair value reserve 5 1 1 7
Other temporary differences 28 -5 2 4 29
Total 64 -15 1 4 46 102
Net deferred tax assets/liabilities 80 3 -3 -2 -24 55
22. Pension obligations
MEUR 2016 2015
Net defined benefit liabilities on 31 December 168 161
Liability for other long term employee benefits on 31 December 10 8
Wärtsilä has defined benefit plans for its employees mainly in Europe and Asia. The major plans are located in Switzerland, Germany, Great Britain and Sweden. The Swiss defined benefit plan accounts for 31% of the Group's total defined benefit obligations and 52% of the plans' assets. Most of the plans provide a lifetime pension to the members at the normal retirement age but there are also plans, which provide a lump sum payment at the retirement date. Most of these defined benefit pension plans are managed by pension funds. Their assets are not included in the Group's assets. The plans' assets are typically invested according to the investment strategies approved by the funds' Board of Trustees, or in some cases they are completely administered by insurance companies. Wärtsilä's subsidiaries make their payments to pension funds in accordance with the local legislation and practice. Authorised actuaries in each country have performed the actuarial calculations required for the defined benefit plans.
The Swiss Plan
Wärtsilä operates a defined benefit plan in Switzerland in accordance with the local pension laws and regulations. The plan provides benefits to the members in the form of a pension payable after retirement. The level of benefits provided depends on the accrued retirement savings capital, which is a result of contributions paid up to retirement plus respective interest. The plan is run as a pension fund by the Board of Trustees separately from the company.

Contributions to the plan are paid both by the employees as well as by the employers based on a percentage of the insured salary as defined in the pension fund regulations. Contributions by the employers vary depending on the age of the employee and cover on average two thirds of the total contributions.

The investment strategy for a pension fund's asset is the responsibility of the Board of Trustees. Assets are invested in accordance with the strategy and the corridors for different investment categories as defined by local laws. Other risks of the plan are longevity of plan members as well as death or disability of employees before their retirement. The pension plan is reinsured for the risk of death and disability until 31 December 2016. Inflationary increases for pensions in payment are at the discretion of the Board of Trustees as benefits paid by the plan are exceeding the minimum level required by law.
The German Plans
Wärtsilä operates defined benefit plans in Germany in accordance with the local pension laws and regulations. The plans provide benefits to the members in the form of a pension payable after retirement. The level of benefits provided depends on the accrued retirement savings capital, which is a result of contributions paid up to retirement plus respective interest. The plans vary from unfunded plans to a plan run as a pension fund.

In some of the plans, contributions are paid to the plan both by the employees and the employers based on a percentage of the insured salary as defined in the pension fund regulations. However, in some plans only the employer is obliged to make the payments. Contributions by the employers vary depending on the age of the employee, the duration of the employment and also on the position of the employee.

The main risks of the plans are longevity of plan members and death or disability of employees before their retirement. In a funded plan, also the investment strategy chosen includes certain risk. Inflationary increases for pensions in payment are valuated on a yearly basis.
MEUR 2016 2015
Present value of unfunded defined benefit obligations 119 114
Present value of funded defined benefit obligations 206 200
Fair value of plan assets -156 -152
Net liability in the statement of financial position 168 161
% Present value of defined benefit obligations Fair value of plan assets
Switzerland 31 52
Germany 22 4
Other Europe 38 34
Asia 8 10
Total 100 100
MEUR Present value of defined benefit obligation Fair value of plan assets Net defined benefit liability
Balance on 1 January 2015 236 -136 100
Changes in exchange rates 9 -5 4
Acquisitions 75 -10 65
Recognised in the statement of income:
Current service cost 11 11
Gains (-) / losses (+) on curtailments and settlements -3 3
Interest cost (+) / interest income (-) 6 -3 3
Remeasurements recognised in other comprehensive income:
Return on plan assets, excluding interest income -8 -8
Changes in demographic assumptions -1 -1
Changes in financial assumptions 1 1
Contribution paid by the plan members 1 -1
Contribution paid by the employer -9 -9
Benefits paid -24 17 -7
Balance on 31 December 2015 313 -152 161
Balance on 1 January 2016 313 -152 161
Changes in exchange rates -4 2 -2
Recognised in the statement of income:
Current service cost 9 10
Gains (-) / losses (+) on curtailments and settlements -1 1
Interest cost (+) / interest income (-) 6 -2 3
Remeasurements recognised in other comprehensive income:
Return on plan assets, excluding interest income -10 -10
Experience adjustments -1 -1
Changes in financial assumptions 24 24
Contribution paid by the plan members 1 -1
Contribution paid by the employer -10 -10
Benefits paid -24 16 -8
Balance on 31 December 2016 323 -156 168
Plan assets invested in:
% 2016 2015
Shares and other equity instruments 23 26
Bonds and other debt instruments 31 32
Property 15 14
Other assets 30 28
The main actuarial assumptions at the end of the financial period are (expressed as weighted averages):
% 2016 2015
Discount rate 1.51 2.06
Future salary growth 2.05 2.23
Future pension growth 1.17 1.14
On 31 December 2016, the weighted average duration of the defined benefit obligation was 12 years. The Group expects to contribute EUR 8 million to the plans during the next financial period.
Assumptions regarding future mortality are set based on actuarial advice in accordance with the published statistics and experience in each country. These assumptions translate into a weighted average life expectancy in years for a pensioner at the retirement age as follows:
2016 2015
Plan participants retiring at the end of the financial period:
Male 17.2 17.7
Female 19.4 19.6
Plan participants retiring 20 years after the end of the financial period:
Male 18.2 19.5
Female 20.2 21.9
The following table presents a sensitivity analysis for each significant actuarial assumption showing how the defined benefit obligation would have been affected by changes in the relevant actuarial assumption that were reasonably possible at the end of the financial period. This sensitivity analysis applies to the defined benefit obligation only and not to the net defined benefit pension liability in its entirety.
Sensitivity analysis
Effect to defined
benefit obligation, MEUR
Change in assumption 2016 2015
Discount rate increase 1% -35 -36
Discount rate decrease 1% 47 46
Future salary growth increase 1% 13 12
Future salary growth decrease 1% -7 -7
Future pension growth increase 1% 30 31
Future pension growth decrease 1% -16 -16

      

23. Equity
Equity consists of share capital, share premium, translation differences, fair value reserve, remeasurements of defined benefit liabilities and retained earnings.
Share capital and number of shares
MEUR
Share capital Number
of shares
and votes
Share
capital
Share
premium
Total
1 January 2015 197 241 130 336 61 397
31 December 2015 197 241 130 336 61 397
31 December 2016 197 241 130 336 61 397
Wärtsilä's share does not have a nominal value.
Share Capital
The subscription price of a share received by the Company in connection with share issues is credited to the share capital, unless it is provided in the share issue decision that a part of the subscription price is to be recorded in the fund for invested non-restricted equity.
Share Premium
Share premium is restricted equity. It may be reduced in accordance with the rules applying to decreasing share capital in accordance with Finnish Limited Liability Companies Act. It can also be used to increase the share capital.
Translation differences
Translating foreign subsidiaries' financial statements by using different exchange rates in the statement of comprehensive income and in the statement of financial position causes translation differences, which are recognised in equity. Translation differences of foreign subsidiaries’ acquisition cost eliminations and post acquisition gains and losses are also presented in equity. The change in translation differences is recognised in other comprehensive income.
Fair value reserve
Fair value reserve includes the change in the fair value of available-for-sale financial assets. Also the change in fair value in derivative financial instruments is included in fair value reserve, if the hedging is effective and eligible for hedge accounting. The change in items included in fair value reserve are recognised in other comprehensive income.
MEUR Cash flow
hedges
Difference between fair value and carrying amount on 1 January 2015 -89
Taxes related to fair value adjustments 23
Fair value reserve on 1 January 2015 -66
Transferred to the statement of income, net of taxes 16
Fair value adjustments -23
Taxes related to fair value adjustments 4
Fair value reserve on 31 December 2015 -70
Transferred to the statement of income, net of taxes 44
Fair value adjustments -16
Taxes related to fair value adjustments 4
Fair value reserve on 31 December 2016 -39
Parent company's distributable funds
After the balance sheet date, the Board of Directors proposed that a dividend of EUR 1.30 per share be paid for the financial period 2016, total dividend payable being EUR 256 million. The remaining part of the retained profits will be carried further in the unrestricted equity. For the profit for the financial period 2015, a dividend of EUR 1.20 per share was distributed, totalling EUR 237 million, and the rest of the retained profits were carried further in the unrestricted equity.
Additional information on equity is presented in Notes to the parent company financial statements, in Note 10. Shareholders' equity.
24. Provisions
2016
MEUR Litigation Warranties Onerous
contracts
Restruc-
turing
Other
provisions
Total
Provisions on 1 January 2016 15 187 17 15 35 269
Changes in exchange rates 1 1
Additions 6 48 10 22 7 94
Used provisions -1 -66 -9 -18 -8 -103
Released provisions -2 -2 -2 -5 -11
Provisions on 31 December 2016 17 170 17 18 29 250
Non-current 44
Current 206
2015
MEUR Litigation Warranties Onerous
contracts
Restruc-
turing
Other
provisions
Total
Provisions on 1 January 2015 25 190 24 24 28 292
Changes in exchange rates 2 2
Acquisitions 6 8 7 19
Additions 2 84 11 11 16 123
Used provisions -14 -97 -13 -17 -12 -154
Released provisions -3 -4 -2 -6 -15
Provisions on 31 December 2015 15 187 17 15 35 269
Non-current 46
Current 223
Warranty provisions include estimated future warranty costs relating to products delivered. The amount of future warranty costs is based on accumulated historical experience. The standard warranty period is one year from the delivery onwards.
The Group is a defendant in a number of legal cases which arise out of, or are incidental to, the ordinary course of its business. These lawsuits concern mainly issues such as contractual and other liability, labour relations, property damage and regulatory matters. The Group receives from time to time claims of different amounts and with varying degrees of substantiation. There is currently one unusually sizeable claim. It is the Group’s policy to provide for amounts related to the claims as well as for the litigation and arbitration matters when an unfavourable outcome is probable and the amount of loss can be reasonably estimated.
25. Financial liabilities
2016
Current Non-current
MEUR < 1 year 1–3 years 3–5 years > 5 years Total
Loans from pension insurance companies* 10 8 18
Loans from other financial institutions* 95 137 187 186 606
Finance lease liabilities* 1 1
Other interest-bearing debt* 3 4
Trade payables 502 502
Derivatives 45 45
Other liabilities 6 6
Total 662 145 187 186 1 181
* Estimated interest expenses, total 8 12 10 5 34
Estimated contractual cash flows 670 157 197 191 1 215
2015
Current Non-current
MEUR < 1 year 1–3 years 3–5 years > 5 years Total
Loans from pension insurance companies* 27 18 45
Loans from other financial institutions* 72 170 112 189 544
Finance lease liabilities* 1 1
Other interest-bearing debt* 133 134
Trade payables 510 510
Derivatives 32 32
Other liabilities 2 2
Total 777 188 112 189 1 268
* Estimated interest expenses, total 8 10 8 8 34
Estimated contractual cash flows 785 198 120 197 1 302
Fair values of financial liabilities are presented in Note 18. Financial assets and liabilities by measurement category.
26. Other liabilities
MEUR 2016 2015
Project costs 479 557
Personnel costs 158 189
Derivatives 45 32
Interest and other financial items 6 2
Other accruals 63 68
VAT liabilities 25 18
Other 58 69
Total 834 935
Non-current 1 2
Current 833 933
27. Derivative financial instruments
The Group applies hedge accounting to significant foreign currency forward contracts. Detailed financial information is presented in Note 30. Financial risks.
MEUR 2016 of which
closed
2015 of which
closed
Nominal values of derivative financial instruments (level 2)
Interest rate swaps 165 185
Cross currency swaps 81
Inflation hedges 1
Currency forwards, transaction risk 2 788 478 2 205 678
Total 3 034 478 2 390 678
Fair values of derivative financial instruments (level 2)
Interest rate swaps -4 -4
Cross currency swaps -10
Currency forwards, transaction risk -22 -18
Total -35 -22
Foreign currency forward contracts are against transactional risks and fall due during the following 12 months. Interest rate swaps are denominated in euros and their average maturity is 26 months. The average maturity for cross currency swaps is 53 months.
Normally all of the Groups' derivatives are done under International Swaps and Derivatives Association's Master Agreements (ISDA). In case of an event of default under these agreements the non-defaulting party may request early termination and set-off of all outstanding transactions. These agreements do not meet the criteria for offsetting in the statement of financial position. The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements.
MEUR 2016 2015
Gross fair values of derivative financial instruments subject to ISDAs
Assets
Currency forwards 9 8
Total 9 9
Liabilities
Interest rate swaps -13 -4
Currency forwards -31 -27
Total -44 -31
Net fair values of derivative financial instruments subject to ISDAs
Assets 3 1
Liabilities -38 -23
Total -35 -22
Currency distribution of currency forwards
MEUR Order
book
Net
loans
Currency forwards
USD 562 75
NOK 296 40
CHF 56 279
CNY 46
JPY 34
SGD 7
DKK 14 5
GBP 5 19
SEK 11 1
Other* 26 25
Total 1 049 451
* Other does not include any material single currencies.

      

28. Collateral, contingent liabilities and other commitments
2016 2015
MEUR Debt in the
statement of
financial
position
Collateral Debt in the
statement of
financial
position
Collateral
Mortgages given as collateral for liabilities and commitments
Other commitments 19 10 20 10
Total 19 10 20 10
Chattel mortgages and other pledges and securities given as collateral for liabilities and commitments
Loans from credit institutions 15 6 18 7
Other commitments 20 20
Total 15 26 18 27
MEUR 2016 2015
Guarantees and contingent liabilities
on behalf of Group companies 921 743
Total 921 743
Nominal amounts of rents according to leasing contracts
Payable within one year 34 29
Payable between one and five years 84 76
Payable later 30 29
Total 148 133
29. Related party disclosures
Related parties comprise the Board of Directors, the President and CEO, the Board of Management, the associated companies, and joint ventures.
Management remuneration
Benefits recognised in the statement of income
TEUR 2016 2015
President and CEO
Salaries and other short-term benefits 781 878
Bonuses 179 342
Share based bonuses 216 732
Statutory pension costs 135 169
Voluntary pension costs 182 404
Deputy of President and CEO
Salaries and other short-term benefits 386 562
Bonuses 114 37
Share based bonuses 216 531
Statutory pension costs 32 70
Voluntary pension costs 61 216
Other members of the Board of Management
Salaries and other short-term benefits 1 878 1 852
Bonuses 366 303
Share based bonuses 836 2 651
Statutory pension costs 277 298
Voluntary pension costs 480 426
Total 6 141 9 471
Board of Directors on 31 December 2016
Mikael Lilius, Chairman 155 152
Sune Carlsson, Deputy Chairman 107 106
Maarit Aarni-Sirviö, member 82 81
Kaj-Gustaf Bergh, member 74 73
Tom Johnstone, member 77 74
Risto Murto, member 81 79
Gunilla Nordström, member 74 73
Markus Rauramo, member 86 85
Board of Directors, until 5 March 2015
Alexander Ehrnrooth, member 2
Paul Ehrnrooth, member 2
Total 735 727
Management remuneration, total 6 876 10 198
The holdings of Wärtsilä shares of the President and CEO, and the members of the Board of Directors and Board of Management at the year end were 88,529 shares (68,834).
The President and CEO is entitled to retire on reaching 63 years of age. The members of the Board of Management are entitled to retire on reaching the statutory retirement age. One member of the Board of Management is entitled to retire earlier, on reaching 60 years of age. The Group has no loan receivables from the executive management or the Board of Directors. No pledges or other commitments have been given on behalf of management or shareholders.
Business transactions with the associated companies and joint ventures
MEUR 2016 2015
Sales to the associates and joint ventures 42 46
Purchases from the associates and joint ventures 63 32
Receivables from the associates and joint ventures 7 11
Advances paid to the associates and joint ventures 19 25
Payables to the associates and joint ventures 12 19
Detailed financial information on the associated companies and joint ventures is presented in Note 15. Investments in associates and joint ventures.
30. Financial risks
General
Wärtsilä has a centralised Group Treasury with two main objectives: 1) to arrange adequate funding for the Group’s underlying operations on competitive terms and 2) to identify and evaluate the financial risks within the Group and implement the hedges for the Group companies.
The objective is to hedge against unfavorable changes in the financial markets and to minimise the impact of foreign exchange, interest rate, credit and liquidity risks on the Group’s cash reserves, profits and shareholders’ equity.
The Financial Risk Policy is approved by the Board of Directors. The Treasury employs only such instruments whose market value and risk profile can be reliably monitored.
Foreign exchange risk
Foreign exchange exposures are monitored at the Business level and then netted and hedged at Group level. All fixed sales and purchase contracts are hedged. The estimated future commercial exposures are evaluated by the Businesses, and the level of hedging is decided by the Board of Management. Hedge accounting in accordance with IFRS is applied to most of the hedges of these exposures. The hedges cover such time periods that both the prices and costs can be adjusted to new exchange rates. These periods vary among Group companies from one month to two years. The Group also hedges its position of the statement of financial position, which includes receivables and payables denominated in foreign currencies. The Group does not expect significant losses from foreign exchange rate changes in 2017. The cancellation of orders could lead to ineffective currency hedge. Approximately 67% (64) of sales and 59% (57) of operating costs in 2016 were denominated in euros. The Group’s profits and competitiveness are also indirectly affected by the home currencies of its main competitors: USD, GBP, JPY and KRW.
The instruments, their nominal values, and currency distribution used to hedge the Group’s foreign exchange exposures are listed in Note 27. Derivative financial instruments.
Some Group companies in countries whose currencies are not fully convertible like Brazil have unhedged, intercompany loans nominated either in EUR or USD. Total amount of the loans is EUR 109 million (96).
Since Wärtsilä has subsidiaries and joint ventures outside the euro zone, the Group’s equity, goodwill and purchase price allocations are sensitive to exchange rate fluctuations. At the end of 2016, the net assets of Wärtsilä’s foreign subsidiaries and joint ventures outside the euro zone totalled EUR 1,071 million (1,036). In addition, goodwill and purchase price allocations from acquisitions nominated in foreign currencies amounted to EUR 613 million (591). In 2016, the translation differences recognised in OCI mainly come from changes in GBP exchange rate.
IFRS hedge accounting has been applied to EUR 1,468 million (1,837) currency forwards. A 10% change in the exhange rates would cause from these currency forwards an approximately EUR 109 million (147) net of tax impact on the equity. In 2016, EUR -16 million (-23) fair value adjustments related to cash flow hedges were recognised in equity. EUR -58 million (-21) of the fair value adjustments were transferred from equity to the statement of income as net sales or operating expenses during 2016. In 2016, the result from ineffective portion of the cash flow hedges was EUR -8 million (-1), which was booked in financial items and specified in Note 10. Financial income and expenses.
Currency distribution 2016
% Net sales Operating
costs
Trade
receivables
Trade
payables
EUR 67 59 68 76
USD 20 8 17 6
NOK 2 5 1 2
GBP 2 3 1 3
CHF 1 3
Other EU currencies 1 3 1
SGD 1 2 1 1
BRL 1 1 1
INR 1 1 1
CNY 1 3 1 3
JPY 1 1 1 2
Other currencies 4 11 6 3
Total 100 100 100 100
Interest rate risk
Wärtsilä is exposed to interest rate risk primarily through market value changes to the net debt portfolio (price risk) and also through changes in interest rates (re-fixing on rollovers). Wärtsilä hedges interest rate exposure by using derivative instruments such as interest rate swaps, futures and options. Changes in the market value of these derivatives are recognised directly in the statement of income. Interest rate risk is managed by constantly monitoring the market value of the financial instruments and by using sensitivity analysis.
Interest-bearing loan capital at the end of 2016 totalled EUR 629 million (724). The average interest rate was 1.3% (1.3) and the average re-fixing time 25 months (20). At the end of 2016, a one percentage point parallel decrease/increase of the yield curve would have resulted in a EUR 15 million (15) increase/decrease in the value of the net debt portfolio, including derivatives.
Wärtsilä spreads its interest rate risk exposure by taking both fixed and floating rate loans. The share of floating rate loans as a proportion of the total debt can vary between 30–70%. At the end of 2016, the fixed rate portion of total loans was 69% (58) after adjustment for interest rate derivatives. A one percentage point change in the interest level would cause a EUR 2 million (3) change in the following year’s interest expenses of the debt portfolio, including derivatives.
Additional information related to loans can be found in Note 18. Financial assets and liabilities by measurement category and Note 25. Financial liabilities.
Liquidity and refinancing risk
Wärtsilä ensures sufficient liquidity at all times by efficient cash management and by maintaining sufficient committed and uncommitted credit lines available.
The existing funding programmes include:
• Committed Revolving Credit Facilities totalling EUR 640 million (629).
• Finnish Commercial Paper programmes totalling EUR 800 million (800).
The average maturity of the non-current debt is 43 months (43) and the average maturity of the confirmed credit lines is 33 months (33). Additional information in Note 25. Financial liabilities.
At the year end, the Group had cash and cash equivalents totalling EUR 472 million (334) as well as EUR 640 million (679) non-utilised committed credit facilities. On 31 December 2016, Commercial Paper Programme was not utilised. On 31 December 2015, utilisation amounted to EUR 130 million. Wärtsilä minimises its refinancing risk by having a balanced and sufficiently long loan portfolio.
Revolving credit facilities
MEUR
Year Maturing Available
(end of
period)
2016 640
2017 70 570
2018 160 410
2019 110 300
2020 110 190
2021 130 60
2022 60
Credit risk
The responsibility for managing the credit risks associated with ordinary commercial activities lies with the Businesses and the Group companies. Major trade and project finance credit risks are minimised by transferring risks to banks, insurance companies and export credit organisations.
The credit risks related to the placement of liquid funds and to trading in financial instruments are minimised by setting explicit limits for the counterparties and by making agreements only with the most reputable domestic and international banks and financial institutions.
The Group companies deposit the maximum amount of their liquid financial assets with the centralised treasury when local laws and central bank regulations allow it. The Group’s funds are placed in instruments with sufficient liquidity (current bank deposits or Finnish Commercial Papers) and rating (at least single-A rated instruments or other instruments approved by the Group’s CFO). These placements are constantly monitored by the Group Treasury, and Wärtsilä does not expect any future defaults from the placements.
Aging of trade receivables
2016 2015
MEUR Trade
receivables
of which
impaired
Trade
receivables
of which
impaired
Not past due 763 1 957 2
Past due 1–30 days 124 121
Past due 31–180 days 154 3 173 5
Past due 181–360 days 59 3 43 6
Past due 1 year 191 51 176 50
Total 1 291 58 1 470 63
In 2016, the result impact of write-offs was EUR -10 million (-12).
The Group sells trade receivables in an amount that is currently not significant compared to the trade receivables as a whole. Sold receivables have been de-recognised in the consolidated statement of financial position.
Equity price risk
Wärtsilä has equity investments totalling EUR 12 million (11) in power plant companies, most of which are located in developing countries and performing well according to expectations. Additional information in Note 16. Available-for-sale financial assets.
Capital risk management
Wärtsilä’s policy is to secure a strong capital base to keep the confidence of investors and creditors and for the future development of the business. The capital is defined as total equity including non-controlling interests and net interest-bearing debt. The target for Wärtsilä is to maintain gearing below 0.50 and to pay a dividend equivalent to 50% of operational earnings per share.
MEUR 31.12.2016 31.12.2015
Interest-bearing liabilities, non-current 520 492
Interest-bearing liabilities, current 108 232
Cash and cash equivalents -472 -334
157 390
Loan receivables -7 -18
Net interest-bearing debt 150 372
Total equity 2 321 2 242
Gearing 0.07 0.17
In the capital management Wärtsilä also follows the gearing development:
Equity and liabilities 5 391 5 589
Advances received -516 -564
4 874 5 025
Solvency ratio, % 47.6 44.6