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Annual Report 2016

Wärtsilä Financial Statements Bulletin 2016

This financial statements bulletin is prepared in accordance with IAS 34 (Interim Financial Reporting) using the same accounting policies and methods of computation as in the annual financial statements for 2015. All figures in the accounts have been rounded and consequently the sum of individual figures can deviate from the presented sum figure.

Use of estimates

The preparation of the financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the valuation of the reported assets and liabilities and other information, such as contingent liabilities and the recognition of income and expenses in the statement of income. Although the estimates are based on the management’s best knowledge of current events and actions, actual results may differ from the estimates.

IFRS amendments

In 2016, the Group has applied the amendment to IAS 1 Presentation of Financial Statements - Disclosure Initiative. The amendments clarify the application of the materiality concept and judgement when determining where and in what order information is presented in the financial disclosures. This has some effect on the notes of the financial statements.

Adoption of new and updated IFRS standards

In 2017, the Group will adopt the following new and amended standards issued by the IASB.

New IFRS 9 Financial Instruments replaces the existing guidance in IAS 39 Financial Instruments - Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including new general hedge accounting requirements and a new expected credit loss model for calculating impairment on financial assets. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39.

The Group has assessed the impact of IFRS 9 and foresees some changes in the hedging processes and presentation. The new model aligns the accounting treatment with risk management activities and allows net hedging, from which the gains or losses will be presented on a separate line in the consolidated statement of income. Regarding impairment of financial assets, the change mainly concerns trade receivables where the credit losses will be recognized based on the expected lifetime credit losses. The Group estimates the restatement impact to equity and trade receivables to remain insignificant. Other figures on the comparative period will not be restated.

Amendments to IAS 7 Statement of Cash Flows* - Disclosure Initiative clarify IAS 7 to improve information provided to users of financial statements about an entity's financing activities e.g. by providing a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities (separately from changes in other assets and liabilities). The amendments will have an impact on the notes of the consolidated financial statements.

Amendments to IAS 12 Income Taxes* - Recognition of Deferred Tax Assets for Unrealised Losses clarify the requirements on recognition of deferred tax assets for debt instruments measured at fair value. The amendments will have no significant impact on consolidated financial statements.

The following new and amended standards and interpretations already issued by the IASB will be adopted in 2018 or later, depending on the effective date.

New IFRS 15 Revenue from Contracts with Customers (effective for financial periods beginning on or after 1 January 2018): IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue guidance, including IAS 18 Revenue, and IAS 11 Construction Contracts. Under IFRS 15 an entity shall recognise revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Group has assessed the impacts of IFRS 15 and foresees provisional changes in the revenue recognition method in two business lines. These are long-term service and maintenance agreements and oil and gas business related construction contracts.

In long-term service and maintenance agreements, the customer value is created over time during the contract period. Currently, the percentage of completion is calculated on the basis of the proportion of the contracted services performed. In accordance with IFRS 15, the revenue will be recognised over time based on costs incurred. Due to the standard maintenance schedules this typically delays the revenue recognition in a contract. However, the impact on Group net sales is in large extend mitigated with wide portfolio of agreements in different stages of lifetime.

The key value drivers in oil and gas business construction contracts are engineering, procurement and project management and the manufacturing is usually outsourced. The revenue will be recognised over time based on project progress, measured with costs incurred. Typically this delays the revenue recognition of a project significantly compared to current method, which is measuring the progress based on surveys of work performed. Also in oil and gas business construction contracts the wide portfolio of projects in different stages should mitigate the impact on Group net sales.

The two business lines together represent, depending on the year, approximately 10-15% of the group’s net sales. The estimated combined restatement impact in equity is approximately EUR -10 million.

Amendments to IFRS 2 Share-based Payment* - Clarification and Measurement of Share-based Payment Transactions (effective for financial periods beginning on or after 1 January 2018). The amendments are intended to eliminate the diversity in the classification and measurement of particular share-based payment transactions (accounting for cash-settled share-based payment transactions that include a performance condition, share-based payments in which the manner of settlement is contingent on future events, share-based payments settled net of tax withholdings and modification of share-based payment transactions from cash-settled to equity-settled). The amendments will have no impact on consolidated financial statements.

Amendments to IFRS 4 Insurance Contracts* - Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (effective for financial periods beginning on or after 1 January 2018): Applying IFRS 9 Financial Instruments with IFRS 4. The amendments bring certainty to insurers on whether, and how, they should apply IFRS 9 before they apply the forthcoming insurance contracts standard. The amendments will have no impact on consolidated financial statements.

New IFRS 16 Leases* (effective for financial periods beginning on or after 1 January 2019): IFRS 16 changes the accounting for operating leases by requiring companies to recognise lease assets and lease liabilities in the balance sheet, initially measured at the present value of unavoidable future lease payments, and to depreciate those assets and interest on lease liabilities in the income statement over the lease term. Whether a contract contains a lease is determined on the basis of whether the customer has the right to control the use of an identified asset for a period of time. When adapting IFRS 16, the portion of the lease payments currently included in operating expenses in the consolidated statement of income will be transferred to amortisations and depreciations and the interest portion to financial expenses. Also balance sheet totals will change, leading to some changes in key figures. The Group is assessing the impact of IFRS 16.

* Not yet endorsed for use by the European Union as of 31 December 2016.

The annual figures in this financial statements bulletin are audited.

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