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Notes to the consolidated financial statements

1. Segment information
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 profitability, financial position and development as a whole. Consequently to the management approach by the Chief Operating Decision Maker, Wärtsilä is one operating segment.
The operating segment is subdivided into two mutually supportive market areas, Marine Solutions and Energy Solutions, which are supported by Services. Wärtsilä provides advanced technologies and lifecycle solutions to its marine and energy market customers. These technologies and solutions are sold and delivered globally by the same Wärtsilä companies. Manufacturing supplies products to both Energy Solutions and Marine Solutions from the same assembly lines, allowing for synergies in the production process and in research and development. Also sourcing function supports both market areas and Services. Due to the business model, integrated operations, and governance structure, the Group is reported as one segment. However, to enable better understanding of the different market areas’ development and the business cycles, Wärtsilä discloses the net sales by market areas and Services.
Net sales by market areas and Services
MEUR 2017 2016
Energy Solutions 1 401 943
Marine Solutions 1 307 1 667
Services 2 215 2 190
Total 4 923 4 801
As geographical information, Wärtsilä reports the geographical areas Finland, Other European countries, Asia, the Americas and other continents. In the geographical information net sales are split by customer´s destination and non-current assets by origin.
During the financial period 1 January - 31 December 2017 and 1 January - 31 December 2016 Wärtsilä did not have any individual significant customers or countries.
Geographical information
2017 2016
MEUR Net sales Non-current
assets*
Net sales Non-current
assets*
Finland 115 249 121 264
Other European countries 1 412 1 378 1 460 1 388
Asia 1 948 112 1 774 134
The Americas 1 113 265 1 039 131
Other 335 5 407 6
Total 4 923 2 009 4 801 1 923
* Non-current assets consist of goodwill, intangible assets, property, plant and equipment, investment properties and investments in associates and joint ventures.
2. Acquisitions
Acquisitions 2017
Greensmith Energy Management Systems Inc.
On 3 July 2017, Wärtsilä acquired 100% of Greensmith Energy Management Systems Inc.
Greensmith Energy Management Systems Inc. is a market leader in grid-scale energy storage software and integrated solutions. The acquisition of Greensmith enables Wärtsilä to rapidly expand its footprint in the energy storage market globally and position as a premier energy system integrator.
The following tables summarise the preliminary amounts for the consideration paid for Greensmith, 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 144
Total consideration transferred 144
Preliminary cash flow from the acquisition MEUR
Consideration paid in cash 144
Total cash flow from the acquisition 144
Provisional values of the assets and liabilities arising from the acquisition MEUR
Intangible assets 42
Trade and other receivables 5
Deferred tax assets 4
Total assets 51
Provisions 5
Trade payables and other liabilities 5
Deferred tax liabilities 17
Total liabilities 27
Total net assets 24
Preliminary goodwill 120
The preliminary fair values of acquired identifiable intangible assets at the date of acquisition (including trademark and tehcnology related IP) amounted to EUR 42 million. The fair value of current trade receivables and other receivables is approximately EUR 5 million. The fair value of trade receivables does not include any significant risk.
The preliminary goodwill of EUR 120 million reflects the value of know-how and expertise in grid-scale energy storage and integrated solutions. Wärtsilä foresees that the acquisition will strengthen its position as an energy system integrator as well as support its growth strategy by improving Wärtsilä's offering and services towards customers.
During 2017 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 Greensmith acquisition had occurred on 1 January 2017, management estimates that consolidated net sales would have been EUR 4,928 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 2017.
Other acquisitions
In October, Wärtsilä acquired 100% of Puregas Solutions Ab and Guidance Navigation Holdings Limited.
Puregas Solutions is a Sweden based leader in turnkey biogas upgrading solutions. The acquisition complements Wärtsilä’s existing position in the biogas liquefaction market.
Guidance Navigation Holdings Limited is a UK based privately owned company. The company is a technology leader in the marine industry for sensor solutions relating to dynamic positioning and other vessel control systems. The acquisition enhances Wärtsilä’s capabilities in the areas of situational awareness and near-field measurement, both essential for more intelligent vessel navigation.
The following tables summarise the preliminary amounts for the consideration paid, the cash flow from the acquisitions and the amounts of the assets acquired and liabilities assumed recognised at the acquisition dates.
Preliminary consideration MEUR
Consideration transferred 63
Total consideration transferred 63
Preliminary cash flow from the acquisitions MEUR
Consideration paid in cash 53
Contingent consideration 9
Cash and cash equivalents of the acquired companies -10
Total cash flow from the acquisitions 52
Provisional values of the assets and liabilities arising from the acquisitions MEUR
Intangible assets 17
Inventories 1
Trade and other receivables 14
Cash and cash equivalents 10
Total assets 43
Provisions 1
Trade payables and other liabilities 9
Advances received 4
Deferred tax liabilities 4
Total liabilities 17
Total net assets 26
Preliminary goodwill 37
The preliminary fair values of acquired identifiable intangible assets at the date of acquisitions (including customer relations, technology and trade marks) amounted to EUR 17 million. The fair value of current trade receivables and other receivables is approximately EUR 14 million. The fair value of trade receivables does not include any significant risk.
The preliminary goodwill of EUR 37 million reflects the value of know-how and expertise in turnkey biogas upgrading solutions and more intelligent vessel navigation. Wärtsilä foresees that acquisition of Puregas Solutions Ab will strengthen and complement its position in the biogas liquefaction market as well as improve Wärtsilä's offering and reach in the gas value chain. The acquisition of Guidance Navigation Holdings Limited enhances Wärtsilä’s capabilities in the areas of situational awareness and near-field measurement, both essential for more intelligent vessel navigation.
During 2017, 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 other acquisitions had occurred on 1 January 2017, management estimates that consolidated net sales would have been EUR 4,940 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 dates of acquisitions would have been the same if the acquisitions had occurred on 1 January 2017.
Acquisitions 2016
American Hydro Corporation
On 30 June 2016, Wärtsilä acquired 100% of 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 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.
Total consideration MEUR
Consideration transferred 46
Total consideration transferred 46
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
The assets and liabilities arising from the acquisition at fair value 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
Goodwill 22
The 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 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. 100% 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 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.
Total consideration MEUR
Consideration transferred 41
Total consideration transferred 41
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
The assets and liabilities arising from the acquisition at fair value 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
Goodwill 34
The 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 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 acquisitions would have been the same if the acquisitions had occurred on 1 January 2016.
3. Disposals
Disposals 2017
In 2017, there were no 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 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 profit for the financial period were not significant.
4. Long-term construction contracts and operating and maintenance agreements
MEUR 2017 2016
Net sales recognised for the financial period
From long-term construction contracts 980 813
From long-term operating and maintenance agreements 392 331
Long-term construction contracts in progress
Aggregated amount of costs incurred and recognised profits 2 592 2 213
Advances received at 31 December 2 213 1 965
Receivables from the revenue recognition netted with the advances received at 31 December 379 249
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 2017 2016
Capital gains 18 7
Government grants 10 8
Sale of scrapped material 3 3
Income related to cancelled orders* 6 9
Insurance indemnities 4 7
Other 20 21
Total 60 55
* Expenses related to cancelled orders are recorded on respective expense accounts.
6. Material and services
MEUR 2017 2016
Purchases during the financial period -1 415 -1 207
Change in inventories 1 -27
External services -1 144 -1 119
Total -2 558 -2 353
7. Employee benefit expenses
MEUR 2017 2016
Wages and salaries 1 000 939
Pension costs
Defined benefit plans 9 10
Defined contribution plans 66 63
Other compulsory personnel costs 139 147
Total 1 214 1 159
Management remuneration is specified in Note 28. Related party disclosures.
Long-term incentive schemes
Wages and salaries include a provision for expenses arising from bonus schemes 2014, 2015 and 2016, totalling EUR 40 million (5). The provision is recognised at fair value. The 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. When a bonus scheme ends and the employment requirement is fulfilled, the bonus is settled in cash. Board of Management members shall acquire Wärtsilä shares with 50% of the net bonuses received, until the share ownership corresponding to the individuals' annual gross base salary level has been achieved.
The bonus payment for bonus schemes is based on the share price development during a three-year period. The 2014 bonus scheme comprises 1,805,000 bonus rights, the 2015 bonus scheme 1,843,000 bonus rights and the 2016 bonus scheme 2,047,000 bonus rights. For the bonus scheme 2014 the basis of a share price is EUR 44.25, for the bonus scheme 2015 EUR 47.47 and for the bonus scheme 2016 EUR 48.57. The 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, EUR 13.84 in the 2015 bonus scheme or EUR 18.21 in the 2016 bonus scheme.
2017 2016
Personnel on average 17 866 18 332
Personnel at the end of the financial period 18 065 18 011
8. Depreciation, amortisation and impairment
MEUR 2017 2016
Development expenses 12 9
Purchase price allocation amortisation 36 35
Other intangible assets 12 15
Buildings and structures 15 15
Machinery and equipment 45 46
Other tangible assets 1 1
Impairments 14 17
Total 134 138
9. Other operating expenses
MEUR 2017 2016
Travel costs 138 128
Rental costs 90 93
Legal and consultancy costs 71 54
Information technology costs 55 55
Other personnel related costs 51 56
Other 173 171
Total 577 556
10. Financial income and expenses
MEUR 2017 2016
Interest income on loans and receivables 2 2
Interest income on financial assets at fair value through the statement of income 9 5
Exchange rate differences* 8
Other financial income 2 4
Total financial income 12 19
Interest expenses on financial liabilities recognised at amortised cost -10 -13
Interest expenses on financial liabilities at fair value through the statement of income -14 -11
Net interest from defined benefit plans -3 -3
Changes in fair values of financial assets/liabilities at fair value through the statement of income 1
Write-down of financial receivables -36
Exchange rate differences* -27
Fee expenses -1
Other financial expenses -4 -8
Total financial expenses -59 -72
Total -47 -53
* In 2017, the result from the ineffective portion of cash flow hedges related to cancelled orders, EUR -15 million (-8) and exchange rate differences from unhedged internal loans, EUR -7 million (14) were included in exchange rate differences in the consolidated statement of income.
11. Income taxes
MEUR 2017 2016
Income taxes
for the financial period -121 -121
for prior financial periods -2
Change in deferred tax
origination and reversal of temporary differences -4 -1
changes in tax rates 4
Total -122 -123
Reconciliation of effective tax rate:
Profit before taxes 506 479
Tax calculated at the domestic corporate tax rate 20.0% -101 -96
Effect of changed tax rates 4 -3
Effect of different tax rates in foreign subsidiaries 4 2
Effect of income not subject to tax and non-deductible expenses -3 -7
Effect of share of result of associates and joint ventures 3 3
Utilisation of previously unrecognised tax losses carried forward 4 1
Unrecognised taxes on losses carried forward -14 -6
Other taxes* -14 -12
Other temporary differences -2 -4
Income taxes for prior financial periods -2
Tax charge in the consolidated statement of income -122 -123
Effective tax rate (%) 24.2 25.6
* Other taxes consist mainly of witholding taxes not utilised and taxes not directly based on taxable 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 20. 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 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 2017 2016
Profit for the financial period attributable to equity holders of the parent company 384 352
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 (EPS), basic and diluted, EUR 1.95 1.79
* Additional information on the number of shares is presented in Note 22. Equity.
13. Intangible assets
Goodwill
Goodwill allocation
Goodwill arising from business acquisitions is allocated to the Group cash-generating unit (CGU) that is the Group´s operating segment. The operating segment represents the lowest level within the Group at which the goodwill is monitored. The companies acquired during the financial period are integrated to the Group CGU at the acquisition date. Previously separately presented CGU’s have also been integrated to the Group CGU during the financial period. The goodwill is presented in the table below:
Goodwill/Cash Generating Unit
MEUR 2017 2016
American Hydro Corporation 23
Eniram Group 34
Wärtsilä, other 1 056
Wärtsilä 1 237 1 112
Impairment testing of goodwill
The Group performs its annual impairment testing of goodwill on 30 September. Impairment of goodwill is also carried out when changes in circumstances indicate that the carrying amount may not be recoverable.
The recoverable amount from the CGU is determined based on value-in-use calculation. The calculation is 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 flow of CGU is 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 flow beyond the five-year period is 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 2017, it has been considered that the general interest rate is currently on a lower level. Wärtsilä has used a WACC of 9.4% (9.6) in the calculations.
As a result of the impairment test, no impairment loss for the CGU was recognised for the financial periods ended 31 December 2017 and 2016 respectively. The recoverable amount from the CGU exceeded its carrying value remarkably.
Sensitivity analysis
The management has assessed that no reasonable possible changes in the key assumptions would cause the CGU´s carrying amount to exceed its recoverable amount. Sensitivity analysis have been carried out for the valuation of the recoverable amount for the CGU by changing the assumptions used in the calculation. 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 increase more than 21 percentage points
Terminal growth rate decrease more than 54 percentage points
Profitability decrease more than 84 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.
2017
MEUR Develop-
ment
expenses
Construc-
tion in
progress
and
advances
paid
Other
intangible
assets
Goodwill Total
Cost on 1 January 2017 107 41 743 1 118 2 008
Changes in exchange rates -15 -33 -49
Acquisitions 61 157 217
Additions 1 19 5 25
Disposals and other changes -12 1 -12
Reclassifications 34 -39 5
Cost on 31 December 2017 142 21 783 1 243 2 189
Accumulated amortisation and impairment on 1 January 2017 -73 -495 -5 -574
Changes in exchange rates 9 10
Accumulated amortisation on disposals and other changes 12 12
Amortisation during the financial period -12 -48 -60
Impairments -1 -1
Accumulated amortisation and impairment on 31 December 2017 -85 -521 -6 -612
Carrying amount on 31 December 2017 57 21 262 1 237 1 577
Development costs for internally generated assets capitalised during the financial period amounted to EUR 16 million (6). The carrying amount was EUR 73 million (68).

Purchase price allocation amortisation amounted to EUR 36 million (35) and the carrying amount was EUR 227 million (209).
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
14. Property, plant & equipment
2017
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 2017 34 349 834 12 25 12 1 266
Changes in exchange rates -1 -10 -18 -30
Additions 2 20 17 39
Disposals -1 -22 -45 -1 -69
Reclassifications -6 -5 -11 -1 -22
Cost on 31 December 2017 31 313 787 18 23 11 1 185
Accumulated depreciation and impairment on 1 January 2017 -1 -179 -660 -21 -861
Changes in exchange rates 4 13 18
Accumulated depreciation on disposals 15 44 59
Depreciation during the financial period -15 -45 -1 -61
Impairments -6 -7 -13
Reclassifications 9 13 1 22
Accumulated depreciation and impairment on 31 December 2017 -2 -172 -642 -20 -835
Carrying amount on 31 December 2017 30 142 146 18 3 11 349
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 18 million (21). During the financial period, investment properties were sold totalling EUR 1 million (1) generating no significant gain (1).
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
15. Investments in associates and joint ventures
MEUR 2017 2016
Carrying amount on 1 January 84 89
Investments 9
Share of result 13 14
Dividends -12 -29
Translation differences -1 1
Disposal of shares -1
Carrying amount on 31 December 83 84
In 2016, Wärtsilä invested EUR 9 million 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 profit for the financial period were not significant.
Summary of financial information (100%):
2017
MEUR Holding % Assets Equity Liabil-
ities
Net
sales
Profit
for the
financial
period
Joint ventures
Wärtsilä Qiyao Diesel Company Ltd. China 50.0 25 19 7 13
Wärtsilä Hyundai Engine Co Ltd. South Korea 50.0 192 122 70 176 34
CSSC Wärtsilä Engine (Shanghai) Co., Ltd. China 49.0 62 22 40 26 -9
Repropel Sociedad de reparacao de helices Portugal 50.0 1 1 1 1
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. Wärtsilä Qiyao Diesel Company Ltd. manufactures marine auxiliary engines in Shanghai, China.
2016
MEUR Holding % Assets Equity Liabil-
ities
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
16. Financial assets and liabilities by measurement category
2017
MEUR Measured
at
amortised
cost
At fair
value
through
the
statement
of income
At fair
value
through
other
compre-
hensive
income
Carrying
amounts
of the
statement
of financial
position
items
Fair
value
Non-current financial assets
Interest-bearing investments 5 5 5
Other investments 13 13 13
Other receivables 3 3 3
Current financial assets
Trade receivables 1 306 1 306 1 306
Trade receivables for sale 1 1 1
Derivatives 15 14 28 28
Other receivables 4 4 4
Cash and cash equivalents 6 373 379 379
Carrying amount by measurement category 1 319 407 14 1 740 1 740
Non-current financial liabilities
Interest-bearing debt 517 517 524
Current financial liabilities
Interest-bearing debt 102 102 102
Trade payables 539 539 539
Derivatives 31 10 41 41
Other liabilities 11 11 11
Carrying amount by measurement category 1 169 31 10 1 211 1 218
2016
MEUR Measured
at
amortised
cost
At fair
value
through
the
statement
of income
At fair
value
through
other
compre-
hensive
income
Carrying
amounts
of the
statement
of financial
position
items
Fair
value
Non-current financial assets
Interest-bearing investments 6 6 6
Other investments 15 15 15
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 measurement category 1 714 24 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 13 31 45 45
Other liabilities 6 6 6
Carrying amount by measurement category 1 136 13 31 1 181 1 192
Fair value hierarchy
Financial instruments measured at fair value are classified according to the following fair value hierarchy: instruments measured using quoted prices in active markets (level 1), instruments measured using inputs other than quoted prices included in level 1 observable either directly or indirectly (level 2), and instruments measured using inputs that are not based on observable market data (level 3). Financial instruments measured at fair value include financial assets and liabilities at fair value through the statement of income. Due to the short nature of the current receivables, their carrying amount is considered to be same as their fair value.
Specific valuation techniques used to value financial instruments include:
• the fair value of forward foreign exchange contracts is determined by using forward rates at the closing date
• the fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves
• the use of quoted market prices or dealer quotes for similar instruments
2017 2016
MEUR Level 2 Level 3 Level 2 Level 3
Financial assets
Other investments 13 15
Interest-bearing investments, non-current 5 6
Other receivables, non-current 3 6
Derivatives 28 9
Financial liabilities
Interest-bearing debt, non-current 524 531
Derivatives 41 45
Additional information on financial liabilities is presented in Note 24. Financial liabilities.
Other investments
Other investments include unlisted shares carried at fair value. These investments are valued using certain DCF models where critical assumptions relate to WACC level and expected cash flows from future dividends. However, the results from different scenarios vary a lot. Thus, the management considers that the valuation at amortised cost is the best estimate of fair value.
MEUR 2017 2016
Carrying amount on 1 January 15 15
Disposal of shares -1
Impairment -1
Carrying amount on 31 December 13 15
In 2017, the cost for other unlisted shares (level 3) was EUR 13 million (15), and the market value of them was EUR 13 million (15).
Interest-bearing debt
MEUR 2017 2016
Carrying amount on 1 January 629 724
Cash flows -3 -98
Exchange rate differences -7
Acquisitions and disposals 2
Carrying amount on 31 December 619 629
17. Inventories
MEUR 2017 2016
Materials and consumables 432 432
Work in progress 557 532
Finished products 27 36
Advances paid 36 42
Total 1 051 1 042
In 2017, EUR 4 million (17) impairment for obsolete inventories has been recognised in the consolidated statement of income. Acquisition-related increase in inventories is EUR 1 million (1).
18. Other receivables
MEUR 2017 2016
Derivatives 28 9
Interest and other financial items 4 10
Insurance receivables 3 10
Rental accruals 4 5
Project accruals 63 10
Accruals from long-term contracts 256 295
Other accruals 46 47
Loan receivables 3 6
Defined benefit plans 1 1
VAT receivables 97 71
Other* 52 49
Total 557 512
Non-current 18 18
Current 539 494
* Includes payroll related tax receivables of EUR 10 million (11) in Brazil, which cannot be utilised within a year.
19. Cash and cash equivalents
MEUR 2017 2016
Cash and bank balances* 359 450
Cash equivalents 20 22
Total 379 472
* EUR 122 million (132) of cash and bank balances relate to cash in countries where repatriation is limited due to local regulation and consequently the cash is not immediately available to the parent company.
20. Deferred taxes
Changes in deferred taxes during 2017
MEUR 1
January
2017
Recog-
nised in
the con-
solidated
statement
of income
Other
compre-
hensive
income
Transla-
tion dif-
ferences
Acquisi-
tions and
disposals
31
December
2017
Deferred tax assets
Tax loss carry-forwards 19 -1 -1 2 18
Pension obligations 25 -2 -1 23
Provisions 32 -2 -2 2 30
Elimination of intragroup margin in inventories 9 -3 5
Fair value reserve 12 -6 -1 6
Other temporary differences 44 -3 -3 41
Total 141 -11 -6 -7 4 123
Deferred tax liabilities
Intangible assets and property, plant and equipment 59 -19 -1 21 57
Fair value reserve 1 2 2
Other temporary differences 35 8 -3 42
Total 93 -10 2 -3 21 102
Net deferred tax assets/liabilities 48 -8 -4 -17 21
On 31 December 2017, the Group had temporary differences on which no deferred tax assets were booked totalling EUR 47 million (45), 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 8 million (12) 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 2016
MEUR 1
January
2016
Recog-
nised in
the con-
solidated
statement
of income
Other
compre-
hensive
income
Transla-
tion dif-
ferences
Acquisi-
tions 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
Elimination of 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
21. Pension obligations
MEUR 2017 2016
Net defined benefit liabilities on 31 December 154 168
Liability for other long term employee benefits on 31 December 11 10
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 28% 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 2017. 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 2017 2016
Present value of unfunded defined benefit obligations 111 119
Present value of funded defined benefit obligations 197 206
Fair value of plan assets -154 -156
Net liability in the statement of financial position 154 168
% Present
value of
defined
benefit
obligations
Fair
value
of plan
assets
Switzerland 28 52
Germany 23 5
Other Europe 41 33
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 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
Balance on 1 January 2017 323 -156 168
Changes in exchange rates -14 10 -4
Other adjustments 4 4
Recognised in the statement of income:
Current service cost 8 9
Interest cost (+) / interest income (-) 5 -2 3
Remeasurements recognised in other comprehensive income:
Return on plan assets, excluding interest income -3 -3
Experience adjustments 8 8
Changes in demographic assumptions -1 -1
Changes in financial assumptions -10 -10
Contribution paid by the plan members 1 -1
Contribution paid by the employer -10 -10
Benefits paid -19 10 -9
Balance on 31 December 2017 307 -154 154
Plan assets invested in:
% 2017 2016
Shares and other equity instruments 26 23
Bonds and other debt instruments 35 31
Property 16 15
Other assets 23 30
The main actuarial assumptions at the end of the financial period are (expressed as weighted averages):
% 2017 2016
Discount rate 1.65 1.51
Future salary growth 2.15 2.05
Future pension growth 1.14 1.17
On 31 December 2017, the weighted average duration of the defined benefit obligation was 12 years. The Group expects to contribute EUR 10 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:
2017 2016
Plan participants retiring at the end of the financial period:
Male 17.7 17.2
Female 19.6 19.4
Plan participants retiring 20 years after the end of the financial period:
Male 19.5 18.2
Female 21.9 20.2
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 2017 2016
Discount rate increase 1% -36 -35
Discount rate decrease 1% 44 47
Future salary growth increase 1% 13 13
Future salary growth decrease 1% -10 -7
Future pension growth increase 1% 28 30
Future pension growth decrease 1% -15 -16
22. 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 2016 197 241 130 336 61 397
31 December 2016 197 241 130 336 61 397
31 December 2017 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 changes in fair value of derivative financial instruments, if the hedging is effective and eligible for hedge accounting. The changes 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 2016 -91
Taxes related to fair value adjustments 22
Fair value reserve on 1 January 2016 -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
Transferred to the statement of income, net of taxes 28
Fair value adjustments 1
Taxes related to fair value adjustments -1
Fair value reserve on 31 December 2017 -10
Parent company's distributable funds
After the balance sheet date, the Board of Directors proposed that a dividend of EUR 1.38 per share be paid for the financial period 2017, total dividend payable being EUR 272 million. The remaining part of the retained profits will be carried further in the unrestricted equity. For the profit for the financial period 2016, a dividend of EUR 1.30 per share was distributed, totalling EUR 256 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.
23. Provisions
2017
MEUR Litigation Warranties Onerous
contracts
Restruc-
turing
Other
provisions
Total
Provisions on 1 January 2017 17 170 17 18 29 250
Changes in exchange rates -2 -1 -1 -4
Acquisitions 1 5 6
Additions 10 57 18 6 11 102
Used provisions -2 -52 -9 -17 -3 -83
Released provisions -6 -3 -1 -10
Provisions on 31 December 2017 19 173 27 6 35 261
Non-current 52
Current 209
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
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, but it is highly unlikely that the outcome of it would be unfavourable. The claim is treated as a contingent liability as 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.
24. Financial liabilities
2017
Current Non-current
MEUR < 1 year 1–3 years 3–5 years > 5 years Total
Loans from pension insurance companies* 8 8
Loans from other financial institutions* 90 112 237 166 605
Finance lease liabilities* 1 1
Other interest-bearing debt* 4 4
Trade payables 539 539
Derivatives 23 1 17 41
Other liabilities 11 11
Total 676 114 255 166 1 211
* Estimated interest expenses, total 7 12 10 5 34
Estimated contractual cash flows 683 126 265 171 1 245
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
Interest expenses for long term loans are calculated by using average interest rate prevailing on 31 December 2017. Fair values of financial liabilities are presented in Note 16. Financial assets and liabilities by measurement category.
25. Other liabilities
MEUR 2017 2016
Project costs 541 479
Personnel costs 191 158
Derivatives 41 45
Interest and other financial items 11 6
Other accruals 52 63
VAT liabilities 26 25
Other 70 58
Total 932 834
Non-current 1 1
Current 931 833
26. Derivative financial instruments
The Group applies hedge accounting to significant foreign currency forward contracts. Detailed financial information is presented in Note 29. Financial risks.
MEUR 2017 of which
closed
2016 of which
closed
Nominal values of derivative financial instruments (level 2)
Interest rate swaps 165 165
Cross currency swaps 74 81
Currency forwards, included in hedge accounting 814 312 1 468 252
Currency forwards, no hedge accounting 1 134 435 1 320 226
Total 2 187 746 3 034 478
Fair values of derivative financial instruments (level 2)
Interest rate swaps -2 -4
Cross currency swaps -17 -10
Currency forwards, included in hedge accounting 2 -12
Currency forwards, no hedge accounting 3 -10
Total -13 -35
In addition, the Group had copper futures and swaps amounting to 254 tons valued at EUR 2 million.
Foreign currency forward contracts are against transactional risks and fall due during the following 12 months (12). A currency forward is considered closed when there are offsetting cash flows in the same currency with the same value date. Interest rate swaps are denominated in euros and their average maturity is 18 months (26). The average maturity for cross currency swaps is 40 months (53).
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 2017 2016
Gross fair values of derivative financial instruments subject to ISDAs
Assets
Currency forwards 28 9
Total 28 9
Liabilities
Interest rate swaps -19 -13
Currency forwards -22 -31
Total -41 -44
Net fair values of derivative financial instruments subject to ISDAs
Assets 12 3
Liabilities -27 -38
Total -16 -35
27. Collateral, contingent liabilities and other commitments
2017 2016
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 16 10 19 10
Total 16 10 19 10
Chattel mortgages and other pledges and securities given as collateral for liabilities and commitments
Loans from credit institutions 11 4 15 6
Other commitments 16 20
Total 11 19 15 26
MEUR 2017 2016
Guarantees and contingent liabilities
on behalf of Group companies 737 921
Total 737 921
Nominal amounts of rents according to leasing contracts
Payable within one year 35 34
Payable between one and five years 101 84
Payable later 48 30
Total 185 148
28. 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 2017 2016
President and CEO
Salaries and other short-term benefits 785 781
Bonuses 234 179
Share based bonuses 3 438 216
Statutory pension costs 145 135
Voluntary pension costs 156 182
Deputy of President and CEO
Salaries and other short-term benefits 425 386
Bonuses 80 114
Share based bonuses 1 719 216
Statutory pension costs 32
Voluntary pension costs 88 61
Other members of the Board of Management
Salaries and other short-term benefits 2 153 1 878
Bonuses 456 366
Share based bonuses 9 896 836
Statutory pension costs 322 277
Voluntary pension costs 493 480
Total 20 389 6 141
Board of Directors on 31 December 2017
Mikael Lilius, Chairman 153 155
Tom Johnstone, Deputy Chairman 108 77
Maarit Aarni-Sirviö, member 78 82
Kaj-Gustaf Bergh, member 74 74
Karin Falk, member 71
Johan Forssell, member 72
Risto Murto, member 79 81
Markus Rauramo, member 81 86
Board of Directors, until 2 March 2017
Sune Carlsson, Deputy Chairman 1 107
Gunilla Nordström, member 1 74
Total 718 735
Management remuneration, total 21 107 6 876
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 97,605 shares (88,529).
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 2017 2016
Sales to the associates and joint ventures 49 42
Purchases from the associates and joint ventures 53 63
Receivables from the associates and joint ventures 14 7
Advances paid to the associates and joint ventures 11 19
Payables to the associates and joint ventures 8 12
Detailed financial information on the associated companies and joint ventures is presented in Note 15. Investments in associates and joint ventures.
29. 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 material 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 69% (67) of sales and 63% (59) of operating costs in 2017 were denominated in euros, and approximately 18% (20) of sales and 7% (8) of operating costs were denominated in US dollars. The remainder were split between several currencies. The Group’s profits and competitiveness are also indirectly affected by the home currencies of its main competitors: USD, GBP, JPY and KRW.
Usually fixed sales and purchase contracts are hedged by using foreign exchange forwards to offset currency rate related changes to the value of the underlying cash flows. As the aim is to hedge and apply hedge accounting (cash flow hedging) only to the foreign exchange risk all interest rate/hedge timing related gains/losses are booked directly into the financial items. As the underlying cash flows can have long maturities, the related hedges can be done with shorter maturities and they can be rolled over when needed, so that at the maturity the total currency rate related gains/losses from these hedges are expected to fully offset the related gains/losses from the underlying cash flows. A cancellation or reduction of sales/purchase value of an order can cause the related hedge to be (partially) ineffective. Any ineffectiveness will be immediately recognised and booked into the financial items.
As hedges are typically done on short maturities (up to 1 year) and only high credit quality (A- minimum rating requirement) counterparties are utilised, counterparty credit risk is expected to have minimal effect on hedge valuations. Due to some underlying hedged cash flows having longer maturities than related hedges the change in present value of the hedge and underlying cash flow does not always fully offset each other during the lifetime of a hedge. This ineffectiveness is calculated on quarterly basis and will be booked on Group level in financial items.
The instruments, and their nominal values, used to hedge the Group’s foreign exchange exposures are listed in Note 26. 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 132 million (109).
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 2017, the net assets of Wärtsilä’s foreign subsidiaries and joint ventures outside the euro zone totalled EUR 1,011 million (1,071). In addition, goodwill and purchase price allocations from acquisitions nominated in foreign currencies amounted to EUR 825 million (613). In 2017, the translation differences recognised in OCI mainly come from changes in GBP exchange rate.
In 2017, EUR 1 million (-16) fair value adjustments related to cash flow hedges were recognised in equity. EUR -36 million (-58) of the fair value adjustments were transferred from equity to the statement of income as net sales or operating expenses during 2017. In 2017, the result from ineffective portion of the cash flow hedges was EUR -15 million (-8), which was booked in financial items and specified in Note 10. Financial income and expenses.
Currency forwards
MEUR Fixed
sales
and
purchase
contracts
Net
loans
Currency forwards
USD 530 241
NOK 760 12
CHF 27 58
CNY 50
JPY 8
SGD 2
DKK 4 6
GBP 11 53
Other* 15 33
Total 1 397 413
* Other does not include any material single currencies.
IFRS hedge accounting has been applied to EUR 1,962 million (1,468) currency forwards. A 5% change in the exhange rates would cause from these currency forwards an approximately EUR 38 million (55) impact on the equity. As all material fixed sales and purchase contracts are hedged, the profit and loss sensitivity of foreign exchange is considered immaterial.
MEUR Gross
amount
Net
amount
Equity
impact
Currency forwards under hedge accounting*
USD 899 340 17
NOK 875 294 15
CNY 56 53 3
JPY 38 3
GBP 35 26 1
CHF 29 18 1
Other 29 28 1
Total 1 962 762 38
* Intragroup transactions, on which the actual hedge accounting bookings are based.
MEUR
Currency forwards, under hedge accounting
31 December 2017 1 962
Hedged highly probable forecasted cash flows by year
2018 1 388
2019 296
2020 113
2021 27
2022- 138
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 2017 totalled EUR 619 million (629). The average interest rate was 1.3% (1.3) and the average re-fixing time 23 months (25). At the end of 2017, a one percentage point parallel decrease/increase of the yield curve would have resulted in a EUR 13 million (15) increase/decrease in the value of the net debt portfolio, including derivatives.
Loans
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%.
MEUR 2017 2016
Fixed rate loans 330 329
Floating rate loans 289 300
Derivatives 105 105
Share of fixed rate loans of total loans (including derivatives), % 70 69
A one percentage point change in the interest level would cause a EUR 2 million (2) change in the following year’s interest expenses of the debt portfolio, including derivatives.
Additional information related to loans can be found in Note 16. Financial assets and liabilities by measurement category and Note 24. 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. Refinancing risk is managed by having a balanced and sufficiently long loan portfolio.
The existing funding programmes include:
• Committed Revolving Credit Facilities totalling EUR 640 million (640).
• Finnish Commercial Paper programmes totalling EUR 800 million (800).
The average maturity of the non-current debt is 44 months (43) and the average maturity of the confirmed credit lines is 28 months (33). Additional information in Note 24. Financial liabilities.
At the year end, the Group had cash and cash equivalents totalling EUR 379 million (472) as well as EUR 640 million (640) non-utilised committed credit facilities. In addition a signed EUR 125 million long term loan was available for disbursement as of 31 December 2017. Commercial Paper Programmes were not utilised on 31 December 2017 nor on 31 December 2016.
Committed Revolving Credit Facilities as well as the Parent Company's long term loans include a financial covenant (solvency ratio). Solvency ratio is expected to remain clearly over the covenant level for the foreseeable future.
Revolving credit facilities
MEUR
Year Maturing Available
(end of
period)
2017 640
2018 160 480
2019 110 370
2020 110 260
2021 130 130
2022 130
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.
The expected credit losses assiociated with investments carried at amortised cost are assessed on a forward looking basis based on investment maturity dates and counterparty credit risk on quraterly basis. As of 31 December 2017 the expected credit loss was not material.
Aging of trade receivables
For trade receivables and receivables from revenue recognition in accordance with percentage of completion method, simplified approach is used and the loss allowance is measured at the estimate of the lifetime expected credit losses. Receivables from revenue recognition in accordance with percentage of completion method are usually covered with advance payments collected from customers. Thus, recognising credit losses based on the lifetime expected loss amounts mainly concerns trade receivables. For trade receivables not due or maximum 359 days overdue, an impairment of 0.1%–2.0% is made, depending on the aging category and the origin of the receivable. In calculating the expected credit loss rates, the company considers historical loss rates for each category, and adjusts for forward looking macroeconomic data. In addition to that, trade receivables more than 360 days old are assessed for impairment individually.
2017 2016
MEUR Trade
receivables
of which
impaired
Trade
receivables
of which
impaired
Not past due 951 1 763 1
Past due 1–30 days 122 124
Past due 31–180 days 189 6 154 3
Past due 181–360 days 33 2 59 3
Past due 1 year 184 53 191 51
Total 1 478 62 1 291 58
In 2017, the result impact of write-offs was EUR -9 million (-10).
Impairments
MEUR 2017 2016
Impairment, beginning of period 58 63
Other movements -4 -14
Impairment during the period 9 10
Impairment, end of period 62 58
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 10 million (12) in power plant companies, most of which are located in developing countries and performing well according to expectations. Additional information in Note 16. Financial assets and liabilities by measurement category.
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 of at least 50% of earnings over the cycle.
MEUR 31.12.2017 31.12.2016
Interest-bearing liabilities, non-current 517 520
Interest-bearing liabilities, current 102 108
Cash and cash equivalents -379 -472
239 157
Loan receivables -5 -7
Net interest-bearing debt 234 150
Total equity 2 396 2 321
Gearing 0.10 0.07
In the capital management Wärtsilä also follows the gearing development:
Equity and liabilities 5 607 5 391
Advances received -522 -516
5 085 4 874
Solvency ratio, % 47.1 47.6
30. Auditors' fees and services
The following remuneration was paid to auditors and accounting firms for audit based on applicable legislation and for other services.
In 2017, the AGM appointed the audit firm PricewaterhouseCoopers Oy as Wärtsilä Corporation's auditor. PricewaterhouseCoopers Oy has provided non-audit services to entities of Wärtsilä Group in total 110 thousand euros. These services included tax services (55 thousand euros) and other services (55 thousand euros).
2017 2016
MEUR PwC Others KPMG Others
Audit 3.0 0.7 3.3 0.2
Tax advisory 0.1 0.3 0.9 0.2
Other services 0.1 0.1 0.4 0.1
Total 3.2 1.1 4.6 0.5
31. Exchange rates
In the consolidated financial statements there are approximately 60 currencies consolidated. The most significant currencies are presented here.
Closing rates Average rates
31 December
2017
31 December
2016
2017 2016
AED United Arab Emirates Dirham 4.40503 3.87108 4.14735 4.05145
BRL Brazil Real 3.97290 3.43050 3.60410 3.86195
CHF Switzerland Franc 1.17020 1.07390 1.11155 1.09018
CNY China Yuan Renminbi 7.80440 7.32020 7.62644 7.34958
DKK Danish krone 7.44490 7.43440 7.43865 7.44536
GBP United Kingdom Pound 0.88723 0.85618 0.87615 0.81890
INR India Rupee 76.60550 71.59350 73.49802 74.35528
JPY Japan Yen 135.01000 123.40000 126.65457 120.31377
NOK Norway Krone 9.84030 9.08630 9.32861 9.29269
SAR Saudi Arabian Riyal 4.49738 3.95361 4.23474 4.13639
SEK Sweden Krona 9.84380 9.55250 9.63687 9.46731
SGD Singapore Dollar 1.60240 1.52340 1.55822 1.52778
USD United States Dollar 1.19930 1.05410 1.12928 1.10660
32. Subsidiaries
Geographical
area
Company name Location Activities Share %
Europe Wärtsilä Cyprus Limited Cyprus Sales and services 100.0
Wärtsilä Danmark A/S Denmark Sales and services 100.0
Wärtsilä Lyngsø Marine A/S Denmark Sales and services 100.0
Wärtsilä Svanehøj A/S Denmark Production, sales and services 100.0
Wärtsilä Puregas Solutions A/S Denmark Sales and services 100.0
Wärtsilä BLRT Estonia Oü Estonia Sales and services 51.7
Eniram Oy Finland Sales and services 100.0
Wärtsilä Finland Oy Finland Production, sales and services 100.0
Wärtsilä Projects Oy Finland Sales and services 100.0
Wärtsilä Solutions Oy Finland Sales and services 100.0
Wärtsilä Technology Oy Ab Finland Holding 100.0
Wärtsilä France S.A.S. France Sales and services 100.0
Eniram Germany GmbH Germany Sales and services 100.0
Wärtsilä Puregas Solutions GmbH Germany Sales and services 100.0
Wärtsilä Deutschland GmbH Germany Sales and services 100.0
Wärtsilä ELAC Nautik GmbH Germany Sales and services 100.0
Wärtsilä Funa International GmbH Germany Sales and services 100.0
Wärtsilä JOVYATLAS EUROATLAS GmbH Germany Sales and services 100.0
Wärtsilä SAM Electronics GmbH Germany Sales and services 100.0
Wärtsilä SAM Electronics Nederland B.V. Germany Sales and services 100.0
Wärtsilä Serck Como GmbH Germany Production, sales and services 100.0
Guidance Marine Ltd Great Britain Sales and services 100.0
Guidance Navigation Holdings Ltd Great Britain Holding 100.0
Wärtsilä Puregas Solutions Ltd Great Britain Sales and services 100.0
Vulcan Insurance PCC Limited Great Britain Sales and services 100.0
Wärtsilä Hamworthy Ltd Great Britain Sales and services 100.0
Wärtsilä UK Ltd Great Britain Production, sales and services 100.0
Wärtsilä Valves Ltd Great Britain Production, sales and services 100.0
Wärtsilä Water Systems Ltd Great Britain Production, sales and services 100.0
Wärtsilä Greece S.A. Greece Sales and services 100.0
Wärtsilä Hungary Kft Hungary Sales and services 100.0
Wärtsilä APSS Srl Italy Sales and services 100.0
Wärtsilä Italia S.p.A. Italy Production, sales and services 100.0
Wärtsilä Moss AS Norway Production, sales and services 100.0
Wärtsilä Norway AS Norway Production, sales and services 100.0
Wärtsilä Oil & Gas Systems AS Norway Sales and services 100.0
Wärtsilä Ship Design Norway AS Norway Sales and services 100.0
Wärtsilä Valmarine AS Norway Sales and services 100.0
Wärtsilä Baltic Design Centre Sp.z.o.o. Poland Sales and services 100.0
Wärtsilä Polska Sp.z.o.o. Poland Sales and services 100.0
Wärtsilä Ship Design Poland Sp.z.o.o. Poland Sales and services 100.0
Wärtsilä Portugal Lda. Portugal Sales and services 100.0
Wärtsilä Vostok, LLC Russia Sales and services 100.0
Wärtsilä Ibérica S.A. Spain Production, sales and services 100.0
Wärtsilä Puregas Solutions AB Sweden Sales and services 100.0
Wärtsilä Sweden AB Sweden Production, sales and services 100.0
Wärtsilä Services Switzerland AG Switzerland Sales and services 100.0
Quantiparts B.V. The Netherlands Sales and services 100.0
Wärtsilä Kampen Real Estate B.V. The Netherlands Real estate 100.0
Wärtsilä Netherlands B.V. The Netherlands Production, sales and services 100.0
Wärtsilä Ukraine LLC Ukraine Sales and services 100.0
The Americas Antigua Energy Operators Ltd Antigua and Barbuda Sales and services 100.0
Wärtsilä Argentina S.A. Argentina Sales and services 100.0
Wärtsilä Brasil Ltda. Brazil Production, sales and services 100.0
Wärtsilä Canada Inc. Canada Sales and services 100.0
Wärtsilä Chile Ltda. Chile Sales and services 100.0
Wärtsilä Colombia S.A. Colombia Sales and services 100.0
Wärtsilä Dominicana Inc. Dominican Republic Sales and services 100.0
Wärtsilä Ecuador S.A. Ecuador Sales and services 100.0
Wärtsilä Guatemala S.A. Guatemala Sales and services 100.0
Wärtsilä Operations Guyana Inc. Guyana Sales and services 100.0
Wärtsilä de Mexico SA Mexico Sales and services 100.0
Wärtsilä Panama Services S.A. Panama Sales and services 100.0
Wärtsilä Peru S.A.C. Peru Sales and services 100.0
Wärtsilä Caribbean, Inc. Puerto Rico Sales and services 100.0
Wärtsilä Uruguay S.A. Uruguay Sales and services 100.0
American Hydro Corporation USA Sales and services 100.0
Greensmith Energy Management Systems Inc. USA Sales and services 100.0
Guidance Marine LLC USA Sales and services 100.0
Puregas Solutions LLC USA Sales and services 100.0
Wärtsilä Defence Inc. USA Sales and services 100.0
Wärtsilä Dynamic Positioning Inc. USA Sales and services 100.0
Wärtsilä North America, Inc. USA Sales and services 100.0
Wärtsilä Venezuela, C.A. Venezuela Sales and services 100.0
Asia PT. Wärtsilä Indonesia Indonesia Sales and services 100.0
Wärtsilä Azerbaijan LLC Azerbaijan Sales and services 100.0
Wärtsilä Bangladesh Ltd. Bangladesh Sales and services 100.0
SAM Taihang Electronics Ltd. China Sales and services 100.0
Wärtsilä Propulsion (Wuxi) Co. Ltd. China Production, sales and services 100.0
Wärtsilä Services (Shanghai) Co. Ltd. China Sales and services 100.0
Wärtsilä Ship Design (Shanghai) Co., Ltd China Sales and services 95.0
Wärtsilä Suzhou Ltd. China Production, sales and services 100.0
Wärtsilä Yuchai Engine Co. Ltd. China Production, sales and services 50.0
Wärtsilä-CME Zhenjiang Propeller Co. Ltd. China Production, sales and services 55.0
Wärtsilä China Ltd. Hong Kong Sales and services 100.0
Wärtsilä India Ltd. India Production, sales and services 100.0
Wärtsilä Japan Ltd. Japan Production, sales and services 99.7
Wärtsilä (Malaysia) Sdn Bhd Malaysia Sales and services 100.0
Wärtsilä Pakistan (Pvt.) Ltd. Pakistan Sales and services 100.0
Wärtsilä Philippines Inc. Philippines Sales and services 100.0
Wärtsilä Doha WLL Qatar Sales and services 100.0
Wärtsilä Power Contracting Saudi Arabia Ltd. Saudi Arabia Sales and services 60.0
Guidance Marine Pte Ltd Singapore Sales and services 100.0
Wärtsilä Pumps Pte. Ltd. Singapore Production, sales and services 100.0
Wärtsilä Ship Design Singapore Pte Ltd Singapore Sales and services 100.0
Wärtsilä Singapore Pte Ltd Singapore Sales and services 100.0
Wärtsilä Korea Ltd. South Korea Sales and services 100.0
Wärtsilä Marine Systems Korea Co Ltd. South Korea Sales and services 100.0
Wärtsilä Lanka Ltd. Sri Lanka Sales and services 100.0
Wärtsilä Taiwan Ltd. Taiwan Sales and services 100.0
Wärtsilä-Enpa A.S. Turkey Sales and services 51.0
Wärtsilä Gulf FZE United Arab Emirates Sales and services 100.0
Wärtsilä Hamworthy Middle East (FZE) United Arab Emirates Sales and services 100.0
Wärtsilä LLC United Arab Emirates Sales and services 100.0
Wärtsilä Ships Repairing & Maintenance LLC United Arab Emirates Sales and services 100.0
Wärtsilä Vietnam Co Ltd. Vietnam Sales and services 100.0
Other Wärtsilä Australia Pty Ltd. Australia Sales and services 100.0
Wärtsilä Central Africa Ltd. Cameroon Sales and services 100.0
Wärtsilä Egypt Power S.A.E Egypt Sales and services 100.0
Wärtsilä Central Africa Gabon Gabon Sales and services 100.0
Wärtsilä West Africa Guinea Guinea Sales and services 100.0
Wärtsilä Eastern Africa S.A. Kenya Sales and services 100.0
Wärtsilä Mocambique LDA Mozambique Sales and services 100.0
Wärtsilä New Zealand Ltd New Zealand Sales and services 100.0
Wärtsilä Marine & Power Services Nigeria Limited Nigeria Sales and services 100.0
Wärtsilä PNG Ltd Papua New Guinea Sales and services 100.0
Wärtsilä West Africa S.A. Senegal Sales and services 100.0
Wärtsilä South Africa (Pty) Ltd. South Africa Sales and services 100.0
Wärtsilä Tanzania Ltd Tanzania Sales and services 100.0
Wärtsilä Uganda Ltd. Uganda Sales and services 100.0
Non-controlling interests are not significant in the Group's activities and cash flows in individual subsidiaries.

The list excludes subsidiaries, which do not have an impact on the profit or assets of the Group. A complete list of shares and securities in accordance with the Finnish Accounting Ordinance is included in the official financial statements of the parent company prepared with the Finnish Accounting Standards (FAS).
33. Events after the balance sheet date
Wärtsilä strengthens its service offering by acquiring Trident B.V., a Netherland based company specialised in underwater ship maintenance, inspection, and repair services. Through the acquisition Wärtsilä becomes the first global operator in the underwater services market as well as builds in-house competence, captures the full potential of services’ product synergies, and strengthens its position in the market.
The enterprise value of the transaction is EUR 17.5 million and an additional EUR 3.5 million earn-out, based on the business performance in the coming years. The turnover of Trident is approximately EUR 9 million.

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