POWR.L Regulatory News (POWR)

13 March 2013

POWERFLUTE OYJ

Preliminary Results for the year ended 31st December 2012

Powerflute Oyj ("Powerflute" or the "Group"), the packaging and paper group, today announces its preliminary results for the year ended 31 December 2012. Powerflute is quoted on the AIM market of the London Stock Exchange (Ticker: POWR).

2012 Overview

2012 was a challenging year for the Group as weak economic conditions and a competitive trading environment led to downward pressure on selling prices and margins during the first half. Although market conditions improved during the seasonally stronger second half, delays to essential investment projects affected production volumes. Despite this, the Group achieved healthy operating profits and operating cash flow and remains in a robust financial position with a solid foundation from which to build in 2013.

Financial Highlights

·; Revenues from continuing operations reduced by 7% to €113.1 million (2011: €121.5 million)

·; Underlying EBITDA of €12.3 million (2011: €16.9 million) delivering an EBITDA margin of 10.9% (2011: 14.0%)

·; Operating profit of €6.9 million (2011: €14.3 million) reflects the competitive environment and a number of one-off costs in 2012

·; EPS of 1.9 cent per share (2011: 3.5 cents)

·; Strong balance sheet with net cash at year-end of €10.9 million (2011: €19.1 million),

·; Proposed full year dividend of 1.3 cent per share (2011: 1.3 cent per share) representing a yield of approximately 5%

·; Investment in Kotkamills completed in July 2012

·; New committed bank facilities in place for the next three years

Commenting on the results, Dermot Smurfit, Chairman of Powerflute said:

"2012 was a challenging year for the Group due to a combination of the tough macro-economic environment, competitive pressure and delays to investment projects. Despite this, we achieved an underlying EBITDA margin of more than 10%, maintained good operational cash generation and remain in a robust financial position with a net cash surplus of more than €10 million.

The operational issues which affected performance during the final quarter of 2012 have been resolved and market conditions continue to be broadly favourable. The Group has made a positive start to the year, with results ahead of the same period of the prior year, and has a solid foundation from which to pursue further development of its existing businesses and to consider further strategic investments."

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About Powerflute

Powerflute Oyj ("the Company" or "Powerflute") is a paper and packaging group quoted on the AIM market of the London Stock Exchange (Ticker: POWR). Through its subsidiary Savon Sellu Oy, the Group operates a paper mill in Kuopio, Finland which produces a specialised form of semi-chemical fluting made from locally sourced birch. Corrugated boxes manufactured using Nordic semi-chemical fluting demonstrate strength and moisture resistance and are used for transportation of fruit and vegetables, high-value industrial goods such as electrical appliances and automotive components. The Kuopio mill is one of only three suppliers of Nordic semi-chemical fluting in Europe.

CHAIRMAN'S STATEMENT

2012 was a challenging year for the Group due to a combination of the tough macro-economic environment, competitive pressure and delays to a number of investment projects. Despite this, we achieved an underlying EBITDA margin of more than 10%, maintained good operating cash flow and remain in a robust financial position with a net cash surplus of more than €10 million.

During the first half of the year, weak economic conditions and a competitive trading environment resulted in lower average selling prices, while a combination of severe winter weather and more demanding environmental requirements meant that production volumes were constrained. In the second half, market conditions improved significantly and the Group enjoyed a period of healthy growth in orders and margins. Unfortunately, due to difficulties encountered with a number of major investment projects we were unable to fully capitalise on the more favourable conditions.

The operational issues which affected performance during the final quarter of 2012 have been resolved and market conditions continue to be broadly favourable. The Group has made a positive start to the year, with results ahead of the same period of the prior year, and has a solid foundation from which to pursue further development of its existing businesses and to consider further strategic investments.

Results of continuing operations

Revenue from continuing operations fell by 7% to €113.1 million (2011: €121.5 million) and the profit from continuing operations was €7.4 million lower at €6.9 million (2011: €14.3 million). Performance in the current year was impacted by exceptional expenses in a number of areas, whereas the prior year benefited from exceptional gains of €1.9 million from the sale of shares of Harvestia. Underlying EBITDA reduced by €4.6 million to €12.3 million (2011: €16.9 million), with €3.6 million of the reduction attributable to lower average selling prices and €1.0 million to the impact of lower production volumes offset by cost saving measures.

Basic earnings per share were 1.9 cents (2011: 3.5 cents). The Board intends to recommend that the dividend is maintained at 1.3 cents per share for the year ended 31 December 2012 (2011: 1.3 cents per share).

Despite continuing uncertainty and general economic weakness, demand from traditional markets remained healthy throughout the year and we made good progress in developing new markets. More intense competition weighed heavily on the market during the first half of the year, particularly in southern European fruit and vegetable producing countries, and average selling prices were lower than those of the prior year. Conditions improved during the second half as efforts at price recovery from producers of both recycled and virgin-fibre grades contributed to an improvement in selling prices and margins. Unfortunately, our own performance was compromised by complications encountered with a number of essential investment projects. Modernisation of key sections of the paper machine took longer than expected and this impacted on the volumes we were able to achieve during the traditionally most profitable final quarter of the year.

Harvestia, the Group's wood supply organisation in Finland, continued to develop well. Although the business reduced in size following the acquisition of Myllykoski by UPM-Kymmene and was affected by more challenging conditions in the saw mill industry, good progress was made in developing new markets and further reducing wood costs for the industrial partners. Following the acquisition of the shares previously held by Myllykoski from UPM, both Vapo and the Group each have a 45% interest in Harvestia with the remaining interest held by management

Development and growth

The Group will continue to invest in the development of its existing businesses and the improvement of its product offering. Recent capital expenditure has delivered performance improvements in line with our expectations, improved the quality and consistency of our products and enhanced our ability to comply with more demanding environmental legislation, while investment in research and development has enabled us to respond to our customers' requirements for continuous improvement in product performance.

In July 2012, the Group invested €1.5 million to acquire 10% of Kotkamills Oy, a large Finnish producer of speciality papers for the construction industry, magazine papers and sawn timber products. Kotkamills brings synergies in a number of areas, particularly for Harvestia, and has interesting potential for the Group.

During the year we looked closely at a number of other acquisition opportunities, but on further inspection none satisfied our demanding investment criteria. We continue to actively seek opportunities for further acquisitions in paper and packaging markets where the Group can create value based on its proven ability to identify, acquire and turnaround undervalued assets.

Delisting from First North and share repurchase programme

The delisting of the shares of Powerflute Oyj from First North Finland, the alternative investment marketplace of NASDAQ OMX Helsinki Limited, was completed on 29 June 2012. Since then, trading of the Company's shares has been concentrated through its primary listing of depositary interests on the AIM market of the London Stock Exchange.

In accordance with the authority granted at the Annual General Meeting held on 26 April 2012, the directors initiated a share repurchase programme which has resulted in the acquisition and transfer into treasury of 5,700,000 of the Company's shares, representing 2.0% of the issued share capital, at a total cost of €1.9 million. The number of shares currently in issue, excluding shares held in treasury, is 284,118,174.

Taxation dispute

During the period, the Group has been required to pay taxes of €3.6 million in connection with the share transactions that occurred as part of the expansion of Harvestia in January 2011 and the disposal of the Graphic Papers business in May 2011. Vero, the Finnish tax administration, has indicated that it considers Powerflute to be a venture capitalist and not an industrial company and that the gains realised are taxable. Following a review of the circumstances by its advisers, the Group considers that it has strong and defensible arguments against the decision of Vero, which it intends to contest to the fullest extent possible. The taxes have been paid in order to avoid penalties and interest. However, they have not been recognised as an expense in the income statement and are recorded in the balance sheet as amount recoverable from Vero.

Financial position

The Group continues to be in a robust financial position with net cash of €10.9 million (2011: €19.1 million), consisting of cash and cash equivalents of €35.1 million and borrowings of €24.2 million, and has a strong financial platform from which to pursue further development of its existing businesses and to consider investment in other paper and packaging businesses.

Dividend

The Board intends to recommend to the Annual General Meeting to be held in Kuopio on 25 April 2013, the payment of a dividend of 1.3 cents per share (2011: 1.3 cents per share) for the year ended 31 December 2012. The record date for the proposed dividend would be Friday, 3 May 2013 and the payment would be made on or about Friday, 24 May 2013. The proposed dividend represents a yield of approximately 5% based on the Group's closing share price on 12 March 2013.

People

On behalf of the directors and shareholders, I would like to thank all of our employees for their continuing commitment and dedication. Through their hard work and resilience, during what has been at times a challenging year for the Group, we have been able to make significant progress in many areas. The Group remains committed to the continued development of a talented, motivated and fulfilled workforce.

Juha Niemelä, who was first appointed as a director in April 2005, has indicated that he intends to reduce his current business commitments and accordingly, does not wish to offer himself for re-election at the forthcoming Annual General Meeting. I would like to take this opportunity to thank him for the contribution that he has made to the development of the Group and its businesses and to wish him a long and happy retirement and every success in his future endeavours.

Outlook

The operational issues which affected performance during the final quarter of 2012 have been resolved and market conditions continue to be broadly favourable. The Group has made a positive start to the year, with results ahead of the same period of the prior year, and has a solid foundation from which to pursue further development of its existing businesses and to consider further strategic investments

Dermot Smurfit

Chairman

13 March 2013

CHIEF EXECUTIVE'S STATEMENT

The last twelve months have been both encouraging and frustrating for the Group and its employees. While our financial performance has been below our expectations due to a combination of both external and internal factors, we have still made good progress in many areas. During the year we further improved our product offering, strengthened our position in traditional markets and increased the degree of penetration into more attractive markets. A number of major modernisation projects were completed as part of our on-going capital expenditure programme and we invested in projects which should deliver superior returns in the future.

The year began with challenging market conditions as a result of price competition between the major producers of recycled and virgin-fibre packaging grades towards the end of 2011, which impacted on the market prices for semi-chemical fluting during the first half. As the year progressed, market conditions in Europe and elsewhere improved and this, together with the rising cost of recycled fibre as a raw material, lead to concerted efforts on the part of producers to achieve price recovery. We were able to benefit from this, particularly in the final quarter of the year. However, while our average selling price fell by only 3% compared with the prior year this still represented a profit impact of €3.6 million.

During the year we made a significant commitment to research and development activity geared towards improving the performance characteristics of our products to address the increasingly demanding technical requirements of our customers. This has resulted in a number of changes to the product offering and enhanced performance in key areas, both of which have been well received by customers. We believe that in many respects our product is the one of the best available in the market and this is reflected in the prices we are achieving.

The level of capital investment in recent years has been significant as we have sought to improve performance and capacity in key areas of the mill. In any complex system, making major changes and integrating new technology and old is challenging and we have experienced a series of technical problems during this process. For much of the first half we experienced reliability issues following modifications made in the pulp mill in 2011. During the annual maintenance shutdown in September, external suppliers were used in the replacement of the vacuum system of the paper machine and modernisation of the winder and we encountered problems and delays with both projects. Together, these difficulties resulted in the loss of 25,000 tonnes of production. Notwithstanding the challenges we have encountered, the completed projects, several of which were essential replacements of items which had reached the end of their useful lives, are delivering returns in line with or ahead of our expectations.

Throughout the year, our management and workforce has demonstrated a high degree of professionalism and commitment to the Group and its customers, often in the face of very challenging circumstances. They have emerged both stronger and more capable as a result of their experiences and I would like to sincerely thank them for their efforts.

We begin 2013 with continuing strong demand for our products and attractive pricing levels. The production challenges of the last quarter are behind us and the Group has made a positive start to the year, from both an operational and financial perspective. Our principal objectives during 2013 will be to maximise returns from the investments we have already made, to consolidate the progress we have made in improving our position in traditional markets and to further increase penetration of new and more attractive markets.

Marco Casiraghi

Chief Executive Officer

13 March 2013

BUSINESS REVIEW

Revenue from continuing operations fell by 7% to €113.1 million (2011: €121.5 million) and EBITDA from continuing operations was €7.1 million lower at €11.7 million (2011: €18.8 million). Operating profit from continuing operations was €6.9 million (2011: €14.3 million) and the profit for the period attributable to shareholders was €5.3 million (2011: €10.1 million).

The prior year results included a gain of €1.9m from the disposal of shares in an associate, while the current year includes expenses of €0.6m relating to an aborted acquisition. Underlying EBITDA reduced by only €4.6 million to €12.3 million (2011: €16.9 million). Of this reduction, €3.6 million was due to lower average selling prices with the remaining €1.0 million due to a combination of lower production volumes offset by benefits from cost reductions and efficiency improvements.

The Group recognised a gain from discontinued activities of €0.7 million (2011: €0.3 million) following a reduction in the level of provisions against uncertainties.

Packaging Papers

The Group operates a paper mill in Kuopio, Finland, which produces a specialised form of semi-chemical fluting for use in the construction of corrugated case materials. Nordic semi-chemical fluting is made from locally sourced birch and boxes manufactured from it demonstrate exceptional strength, rigidity and moisture resistance and are used extensively for transportation of fruit and vegetables and high value industrial goods such as electrical appliances, automotive and other machinery components. The Kuopio mill is one of three large suppliers of semi-chemical fluting based in the Nordic region.

Demand for semi-chemical fluting remained robust throughout the majority of the year due to a combination of slow but continuing economic recovery and good fruit and vegetable harvests in most regions. Although fruit and vegetable producing countries in southern Europe and the tropical regions continue to represent the main markets for the Group's products, we were also successful in increasing the degree of penetration into faster-growing non-European markets and growing our share in the small but attractive heavy duty packaging sector and in northern European markets where transport costs are much lower.

Concern over weakening demand, together with lower raw material costs for producers of recycled containerboard, resulted in more intense competition during the final quarter of 2011 and meant that we began 2012 with lower average selling prices and under a degree of pressure in many traditional markets. The situation improved during the summer months due to a combination of strong underlying demand for virgin-fibre based packaging in Europe and elsewhere and rising recycled fibre costs, which resulted in concerted efforts at price recovery on the part of large containerboard producers. We benefited from this and were able to achieve price increases during the final quarter which restored prices to close to 2011 levels. Despite this, the average net selling price achieved was some 3% lower than the prior year, which had a €3.6 million impact on profitability.

The most disappointing aspect of the year's performance was the relatively low production volumes achieved. Total deliveries were only 234,000 tonnes, some 11,000 tonnes less than the prior year, which was also affected by extended stoppages for essential maintenance and major capital investment projects (2011: 245,000). A combination of reliability issues in the pulp mill following a major investment in 2011, together with severe winter weather conditions which resulted in the need to curtail production to comply with environmental consents, resulted in the loss of 10,000 tonnes of capacity during the first half. Problems with the completion of modernisation of the vacuum system and winder section of the paper machine, both of which had been outsourced to external suppliers, delayed the restart after the annual maintenance shutdown by almost three weeks and resulted in the loss of a further 10,000 tonnes of capacity.

Following the acquisition of the Kuopio mill, the Group committed to a multi-year programme of major capital investment projects. This was intended to improve product quality, performance and output capacity and to address the age and reliability of certain areas of the mill, which was originally constructed in 1968 and had received only limited investment from its former owners during the ten-year period prior to its acquisition by the Group.

The control systems and head box of the paper machine were replaced in 2007 and 2008. Following the rights issue and placing in 2010 and the disposal of the Graphic Papers business in 2011, the financial position of the Group improved materially and a decision was taken to proceed with major investments in the power station and pulp mill. A fully automatic wide-web packing line was installed during 2011 and in 2012, the vacuum system of the paper machine was replaced, a comprehensive rebuild of the winder station was completed, including replacement of the control systems, and major upgrades were made to environmental management systems. Whenever modifications are made to a large and complex integrated process, there is the risk of disruption and the situation is made more challenging when new technology has to be integrated with old. Despite rigorous planning and the selection of leading suppliers, we have experienced difficulties in a number of areas.

Many of the projects completed were essential and while they may have taken longer to complete than anticipated, all have delivered performance improvements in line with or ahead of our expectations. We have seen dramatic gains in product quality and performance, which has enabled us to achieve better pricing. Energy consumption has reduced considerably leading to reduced use of purchased fuels and lower carbon emissions. The automation of control systems and packing lines has allowed us to reduce headcount and further reduce process waste. The nominal capacity of the mill has been increased and we are progressively eliminating bottlenecks in the pursuit of higher volumes.

During 2013, we will complete two further major projects both of which are in the pulp mill. Investment in a modern drum washer and modifications to one of the pulp lines are expected to yield benefits in terms of better quality pulp, cleaner effluents and improved capacity, particularly during the more challenging winter period. The drum washer is an "off-line" investment which can be completed without any risk of disruption to production. The modifications to the pulp lines are based on proven technology and are of low technical risk. Both projects will be outsourced to reputable suppliers.

Harvestia

This was another year of significant change for Harvestia, the Group's wood procurement organisation which is accounted for under the equity method as an associated company. In January 2012, together with our partner Vapo Oy, we completed the repurchase of the shares previously held by Myllykoski Corporation following its acquisition by UPM-Kymmene. The Group now has a 45% interest in Harvestia.

The gradual withdrawal of the Myllykoski volumes and the depressed state of the construction industry, which is the main market for sawn timber products, created a number of operational challenges which we have worked hard to address and have successfully overcome. Unfavourable weather conditions for harvesting and collection during the second half of the year have created further cost and service-related challenges for the forestry sector as a whole. Despite this, Harvestia achieved sales of €187 million (2011: €215 million) and supplied 3.5 million cubic metres of wood to its industrial partners and third party customers (2011: 3.9 million cubic metres).

Kotkamills

Following completion of the minority investment in Kotkamills in July 2012, we have begun to provide support and assistance to the current owners and management. Considerable progress has been made during 2012 and there is the opportunity for further improvement in financial and operational performance during 2013. Harvestia has established a supply relationship with Kotkamills and we believe there is further opportunity for mutually beneficial collaboration. Although the business faces many challenges in the short to medium term, we continue to believe that Kotkamills offers interesting potential for the Group.

FINANCIAL REVIEW

Review of 2012

Market conditions for Packaging Papers were somewhat less favourable than those encountered in 2011, but continued to be relatively good by historical standards. Demand remained reasonably strong throughout the year but average selling prices were 3% lower due principally to increased competitive pressure in the first half of the year following price concessions by producers of recycled containerboard during the final quarter of 2011.

The result for the year was heavily affected by production losses which occurred during the first quarter as a result of reliability issues in the pulp mill and again during the final quarter following difficulties encountered with the replacement of the vacuum system and modernisation of the winder unit of the paper machine during the annual maintenance stop in September. Together, these problems resulted in the loss of more than 20,000 tonnes of production, equivalent to some 7-8% of planned output.

Towards the end of the year the Group also experienced cost inflation on both energy and wood costs as a wetter than normal summer created problems for harvesting of peat and the delayed onset of winter caused problems with collection of wood inventories from remote areas within the forests.

Revenue from continuing operations

Revenue from continuing operations fell by 7% to €113.1 million (2011: €121.5 million), due to a combination of lower average selling prices and lower volumes. Average selling prices fell by 3% compared with the prior year, principally due to competitive pressure caused by lower prices for recycled alternatives. Due to the production problems, deliveries were disappointing at 234,000 tonnes, representing a reduction of 11,000 tonnes compared with the prior year (2011: 245,000 tonnes) and a shortfall of some 7-8% from the planned output for 2012.

Operating profit from continuing operations

Operating profit from continuing operations was €7.4 million lower at €6.9 million (2011: €14.3 million). However, €2.5 million of the change related to non-operating items as 2011 benefited from income of €1.9 million from the sale of shares in Harvestia, while 2012 was impacted by €0.6 million of costs related to an aborted acquisition.

The underlying reduction in EBITDA was €4.6 million. Of this amount, some €3.6 million was due to the impact of lower average selling prices. The remaining €1.0 million reduction was attributable to the combined effect of lower volumes, higher raw material and energy costs per tonne, which were only partially offset by benefits from efficiency improvements and other cost reduction programmes, and a higher depreciation charge reflecting the increased level of capital investment.

Raw materials and consumable costs reduced by €2.8 million (5%) to €57.2 million (2011: €60.0 million). However, once the impact of lower volumes is considered this represents an increase in the cost per tonne of production of approximately 1.5%. Underlying cost inflation on wood, energy and chemical costs was higher than this, but the impact was partially mitigated by lower consumption per tonne as the benefits from previous capital investment projects were realised.

Employee benefit expenses reduced by €1.4 million (8%) to €16.2 million (2011: €17.6 million) as a result of reduced use of temporary staff and lower awards under performance related employee incentive schemes. Other operating expenses reduced by €0.6 million (2%) to €28.1 million (2011: €28.7 million) due to the impact of lower volumes and tight control of overheads.

Depreciation and amortisation increased to €4.8 million (2011: €4.5 million) reflecting the impact of increased capital expenditure in both 2011 and 2012.

Finance income and expenses

The Group had net finance expenses of €0.6 million (2011: €1.9 million) consisting of finance income of €0.7 million (2011: €0.3 million) less finance expenses of €1.2 million (2011: €2.2 million). The reduction in net finance expenses is attributable to the improvement in the Group's financial position and liquidity following completion of the disposal of Graphic Papers in May 2011 and strong cash generation from Packaging Papers.

Profit before tax from continuing operations

Profit before tax from continuing operations reduced to €6.3 million (2011: €12.4 million).

Taxation

The tax charge of €1.7 million (2011: €2.6 million) represents an effective tax rate of 26.8% (2011: 20.9%) and is based upon the weighted average annual tax rate for the year applied to the underlying profit or loss before taxation after adjusting for the impact of disallowable items of income and expenditure and the availability of tax losses. The underlying tax rate on profits before taxation in Finland during the year was 24.5% (2011: 26.0%).

Discontinued operations

In May 2011, the Group disposed of its interests in the Graphic Papers business for total consideration of €38.5 million before disposal costs. At that time, the gain on disposal was calculated after making full provision for all costs to sell, including provisions against future claims. The initial period during which claims could be made by the purchaser under warranties and indemnities has expired and the Group has not been notified of any claims. Accordingly, the remaining provision against future claims has been reduced by €0.7 million to €0.8 million, resulting in a gain for the period from discontinued activities of €0.7 million net of taxation.

Dispute with the Finnish tax authorities

In preparing its financial statements for the year ended 31 December 2011, the Group assumed that as an industrial company it would be able to take advantage of the participation or substantial shareholder exemptions available to industrial companies in Finland and that the gains arising on the disposal of shares of Harvestia in January 2011 and the shares of the Graphic Papers businesses in May 2011 would be exempt from corporate income taxes.

During the course of discussions over the finalisation of the tax filings for 2011, the Group was informed by Vero, the Finnish tax administration, that it is considered by the tax administration to be a venture capitalist and not eligible to take advantage of the participation or substantial shareholder exemptions. Accordingly, Vero considers that the gains arising on the share disposals should be subject to tax and has confirmed assessments for the year ended 31 December 2012 including €3.6 million of taxes relating to the share transactions.

Following a detailed review of the facts and circumstances by its advisers, including consideration of current tax regulations and official guidance on their implementation, recent case history and the treatment of other tax payers in similar circumstances, the Group considers that it has strong and defensible arguments against the decision of Vero, which it intends to contest to the fullest extent possible.

While the taxes have been paid to avoid the risk of interest and further penalties, the Group has not recognised the amount in its income statement but has instead recorded a non-current financial asset in the balance sheet. Full provision has been made against the estimated future costs of handling the dispute within the results of discontinued operations.

Earnings per share and dividends

Basic earnings per share for the year were 1.9 cents (2011: 3.5 cents). Basic earnings per share from continuing operations were 1.6 cents (2011: 3.4 cents).

The directors intend to recommend to the Annual General Meeting to be held in Kuopio on 25 April 2013, the payment of a dividend of 1.3 cents per share for the year ended 31 December 2012 (2011: 1.3 cents per share). The record date for the proposed dividend would be Friday, 3 May 2013 and the payment would be made on or about Friday, 24 May 2013. The proposed dividend would represent a yield of approximately 5% based on the Group's closing share price on 12 March 2013.

Balance sheet

Total assets and total equity and liabilities reduced to €114.7 million at 31 December 2012 (2011: €117.1 million). Total equity remained virtually unchanged at €58.9 million (2011: €58.5 million) as retained profit for the period was similar to the expenditure on dividends and repurchase of own shares. Following the purchase and transfer into treasury of 5.7 million shares under the share repurchase programme, the number of shares in issue reduced to 284.1 million (2011: 289.8 million) and net assets per share increased slightly to €0.21 (2011: €0.20).

Total capital expenditure increased slightly to €8.3 million (2010: €7.7 million) due principally to the additional expenditure required to address the issues that arose during the annual maintenance shutdown. The major projects completed during the year were modifications to the vacuum system of the paper machine, including replacement of eight vacuum pumps with modern turbofans, and modernisation of the winder station including the replacement of drives and control systems. In addition, the Group invested in further upgrades and modifications to the pulp mill and the waste water treatment plant as part of the medium-term de-bottlenecking and environmental compliance programmes.

Cash flow

At the start of the year, the Group had net cash of €19.1 million, consisting of cash and short term deposits of €45.6 million, less interest bearing loans and borrowings of €26.5 million.

During the year, the Group generated a net cash inflow from operating activities of €13.3 million (2011: €19.2 million). EBITDA from continuing operations was €11.7 million (2011: €18.8 million) and net working capital reduced by €3.4 million (2011: €0.4 million reduction), but the Group paid €1.7 million of taxes arising on profits for the year ended 31 December 2011.

Delays to shipments at the year-end resulted in slightly higher inventories at ports or in transit, but this was more than offset by lower wood inventories at the mill and total inventories reduced by €0.8 million. Receivables reduced by €1.5 million due to a combination of shipment delays and lower delivery volumes during the final quarter as a result of the production difficulties, while trade and other payables increased by €1.1 million.

The principal payments made during the year were:

·; €8.3 million of capital expenditure (2011: €7.7 million)

·; €3.8 million of dividends (2011: €2.9 million)

·; €3.6 million of taxes relating to share disposals (2011: nil)

·; €1.7 million of corporate taxes on trading profits (2011: nil)

·; €1.7 million on repurchase of own shares (2011: nil)

·; €1.7million investment in Kotkamills Oy (2011: nil)

·; €1.5 million of loan repayments (2011: €15.3 million)

·; €1.4 million investment in Harvestia (2011: €2.5 million income)

·; €0.9 million of interest and similar costs (2011: €2.8 million)

At 31 December 2012, the Group had a net cash surplus of €10.9 million, consisting of cash and short term deposits of €35.1 million (2011: €45.6 million) less interest bearing loans and borrowings of €24.2 million (2011: €26.5 million).

Borrowing facilities

The maturity profile of the Group's bank and other borrowing facilities at 31 December 2012 was as follows:

Other interest bearing loans and borrowings includes liabilities under revolving credit and invoice finance arrangements. While advances under certain of these facilities are classified as current liabilities due to their short term nature, the facility themselves normally remain available to the Group for a period in excess of one year.

At 31 December 2012, the Group had bank and other borrowing and financing facilities of €24.5 million (2011: €26.0 million) comprising amortising term loans of €4.5 million (2011: €6.0 million) and revolving credit and invoice financing facilities of €20.0 million (2011: €20.0 million). At 31 December 2012, the Group was utilising €23.1 million of these facilities (2011: €25.5 million).

Refinancing of borrowing facilities

At 31 December 2012, the majority of the Group's borrowings were provided under revolving credit and invoice finance arrangements which were due to expire on 31 July 2013. Accordingly, these amounts were shown as falling due for repayment within one year.

On 12 March 2013, the Group entered into a new financing arrangement for the provision of up to €20m of non-amortising borrowing facilities throughout the period to 31 March 2016. The facilities will be utilised to refinance existing obligations. The principal covenants which apply to the new facilities are:

·; Equity ratio

·; Ratio of net debt to EBITDA

·; Ratio of EBITDA to interest expense

·; Minimum liquidity

Going concern

The directors have undertaken a recent and thorough review of the Group's budget, forecasts and associated risks and sensitivities and have concluded that the Group has adequate resources to enable it to continue its activities for the foreseeable future, being a period of at least 12 months from the date of approval of the financial statements.

Foreign exchange

The Group has manufacturing operations in Finland, which is within the European Community and uses the euro as its functional currency. The Group reports its Income Statement and Cash Flow Statement results in euros using the average exchange rate for each month to translate other currency amounts into euros. The Balance Sheet is translated using the exchange rates prevailing at the Balance Sheet date.

The Group sells and distributes its products and purchases raw materials in international markets and has transactional exposure to a number of other currencies and, in particular, to the US dollar. Approximately 30% of the Group's sales by volume and value and approximately 5% of its expenditure on raw materials, consumables and other expenses are denominated in US dollars.

The relative movement of the US dollar against the euro during 2012 when compared to 2011 is summarised below:

·; Movement in average exchange rate between 2011 and 2012 - 8% favourable

·; Movement in exchange rate at balance sheet date between 2011 and 2012 - 2% adverse

Treasury management and currency risk

It is the policy of the Group to hedge a portion of its foreign currency exposures for a maximum period of up to 12 months using forward exchange contracts. Wherever possible the Group takes advantage of natural hedges between income and expenditure and only considers hedging the net exposure. The Group does not seek to designate such derivative contracts as hedges for the purpose of hedge accounting. Forward currency exposures are reviewed on an on-going basis by the senior management of the Group, but decisions on the application and implementation of the hedging policy are reserved for the Board. The Group does not engage in currency speculation.

PRINCIPAL RISKS AND UNCERTAINTIES

The management of the Group's businesses and the execution of its strategy are subject to a number of risks attributable to both the specific operations of the business and to the macroeconomic environment. The following section comprises a summary of what the Board considers to be the principal risks and uncertainties which could potentially impact on the Group's operating and financial performance.

SUMMARY AND OUTLOOK

Weak economic conditions, a tough competitive environment and delays to essential investment projects meant that 2012 was more challenging for the Group than the prior year. While the financial performance was below our expectations due to a combination of both external and internal factors, we still made good progress in many areas. During the year we further improved our product offering, strengthened our position in traditional markets and increasing the degree of penetration into more attractive markets. A number of major modernisation projects were completed as part of our on-going capital expenditure programme and we invested heavily in projects which should deliver superior returns in the future.

We begin 2013 with continuing strong demand for our products and attractive pricing levels. The production challenges of the last quarter have been resolved and the Group has made a positive start to the year, from both an operational and financial perspective. Our principal objectives during 2013 will be to maximise returns from the investments we have already made, to consolidate the progress we have made in improving our position in traditional markets and to further increase penetration of more attractive markets. The Group remains in a robust financial position and continues to actively seek opportunities for further acquisitions in paper and packaging markets where it can create value based on its proven ability to identify, acquire and turnaround undervalued assets.

for the year ended 31 December 2012

for the year ended 31 December 2012

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 31 December 2012

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2012

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate information

Powerflute Oyj is a public limited company incorporated and domiciled in Finland. The address of the registered office is Sorsasalo/Box 57, FI-70101 Kuopio, Finland. The Company is listed on the Alternative Investment Market (AIM) of The London Stock Exchange.

The consolidated financial statements of the Company for the year ended 31 December 2012 were approved for issue by resolution of the Company's Board of Directors 12 March 2013.

The principal activities of the company and its subsidiaries ("the Group") are described in Note 7.

2. Accounting policies

2.1 Basis of preparation

The consolidated financial statements of Powerflute Oyj and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and adopted by the EU.

The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in euros and all values are rounded to the nearest thousand (€000) except when otherwise indicated.

2.2 Basis of consolidation

The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December of each year.

Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtained control, and continue to be consolidated until the date that such control ceases. The financial information relating to subsidiaries is prepared for the same reporting year as the parent company, using consistent accounting policies. All intra-group balances, income and expenses, unrealised gains and losses and dividends resulting from intra-group transactions are eliminated in full.

The business combination of Powerflute Oyj and Savon Sellu Oy is accounted for in accordance with the pooling of interest method.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary it:

§ Derecognises the assets (including goodwill) and liabilities of the subsidiary

§ Derecognises the carrying amount of any non-controlling interest

§ Derecognises the cumulative translation differences recorded in equity

§ Recognises the fair value of the consideration received

§ Recognises the fair value of any investment retained

§ Recognises any surplus or deficit in profit or loss

§ Reclassifies the parent's share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate

In the statement of comprehensive income, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations down to the level of profit after taxes. This approach is adopted even where the Group retains a non-controlling interest in the subsidiary.

2.3 Changes in accounting policy and disclosures

The accounting policies adopted by the Group are consistent with those of the previous year except as mentioned below.

The Group has adopted all of the following new and amended IFRS and IFRIC interpretations that are relevant to its operations and effective as of 1 January 2012:

IAS 12 Income Taxes (Amendment)- Deferred Tax: Recovery of Underlying Assets

IFRS 7 Financial instruments: Disclosures - Enhanced derecognition Disclosure Requirements

The adoption of the new standards and interpretations mentioned above did not have any impact on the accounting policies, financial position or performance of the Group. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

2.4 Summary of significant accounting policies

a) Business combinations and goodwill

Business combinations other than those between entities under common control are accounted for in accordance with the acquisition method. Under the acquisition method the cost of acquisition is allocated to the acquired identifiable assets, liabilities and contingent liabilities (net assets) based on their fair values at the date of acquisition. Any difference between the cost of acquisition and the fair value of the acquired net assets is recognised as goodwill in the consolidated statement of financial position or income (referred to as negative goodwill) in the consolidated income statement.

Goodwill is initially measured at cost, being the excess of the cost of acquisition over the fair value of the acquired net assets. Following initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

Business combinations between entities under common control are accounted for in accordance with the pooling of interest method. Under the pooling of interest method the entities are combined from the beginning of the financial year in which the combination took place. The consolidated income statement reflects the results of the combining entities for the full year and the consolidated balance sheet the assets and liabilities at their carrying values. The excess of the cost of acquisition over the share capital of the acquired entity is recognised in consolidated shareholders' equity. Goodwill is not recognised.

b) Investment in associated companies

Associated companies are entities over which the Group has significant influence but not control. The Group's investments in associated companies are accounted for using the equity method.

Under the equity method, the Group's investment in an associate is initially recorded in the statement of financial position at cost and is later adjusted for changes in the Group's share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.

The Group's share of the results of operations of an associate is recognised in the income statement and its share of any changes in the equity is recognised and disclosed, when applicable, in the statement of changes in equity. Unrealised gains and losses on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associated company, unless the loss provides evidence of an impairment of the asset transferred.

The Group's share of profit of associated companies is shown on the face of the income statement. This is the profit attributable to equity holders of the associate and, therefore, is profit after tax and non-controlling interests in the subsidiaries of the associates.

Unless otherwise stated in Note 6, the financial statements of associated companies are prepared for the same reporting period as the parent company. Accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group.

After application of the equity method, the Group determines whether It is necessary to recognise an additional impairment loss on its investment in an associated company. At each reporting date, the Group determines whether there is any objective evidence that an investment in an associated company is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the impairment loss in the income statement.

Upon loss of significant influence over an associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the investment in an associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised In profit or loss. Equity accounting is discontinued when the Group has lost its significant influence over the associate or when the carrying amount of the investment in an associated company reaches zero, unless the Group has incurred or guaranteed obligations in respect of the associated company.

c) Non-current assets held for sale

Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is considered to be met only when the sale is highly probable, the asset or disposal group is available for immediate sale in its present condition and the sale is expected to qualify for recognition as a completed sale within one year from the date of classification.

Property, plant and equipment and intangible assets once classified as held for sale are not depreciated or amortised.

d) Foreign currency translation

The consolidated financial statements are presented in euros, which is the functional and presentation currency of the Group and all of its subsidiaries and associated companies.

Transactions denominated in foreign currencies are translated into the functional currency using the exchange rates prevailing on the transaction date. Monetary assets and liabilities in foreign currencies are translated into the functional currency using the exchange rates prevailing at the reporting date. Foreign exchange gains and losses arising from financial assets and liabilities are recorded in the income statement.

e) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duty, and is adjusted for exchange differences on sales in foreign currency. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent and has concluded that it is acting as principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognised:

(i) Sale of goods

Revenue from the sale of the goods is recognised as income when the significant risks and rewards of ownership of the goods have passed to the buyer and the Group no longer has a continuing right to dispose of the goods or effective control over the goods. Usually, this means that sales are recorded upon delivery of goods to the customer in accordance with agreed terms of delivery, which are based on Incoterms 2000. The main categories of terms covering Group sales are:

§ "D" terms, under which the Group is obliged to deliver the goods to the buyer at the agreed destination, usually the buyer's premises, in which case the point of sale is the moment of delivery to the buyer.

§ "C" terms, whereby the Group arranges and pays for the external carriage and certain other costs, though the Group ceases to be responsible for the goods once they have been handed over to the carrier in accordance with the relevant term. The point of sale is thus the handing over of the goods to the carrier contracted by the seller for the carriage to the agreed destination.

§ "F" terms, being where the buyer arranges and pays for the carriage, thus the point of sale is the handing over of goods to the carrier contracted by the buyer.

(ii) Interest income

For all financial instruments measured at amortised cost and interest bearing financial assets classified as available for sale, interest income or expense is recorded using the effective interest rate (EIR) method. Interest income is included in finance income in the income statement.

f) Taxes

(i) Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date at the countries where the Group operates and generates taxable income.

Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

(ii) Deferred tax

Deferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

§ where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

§ in respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except:

§ where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

§ in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current income tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

(iii) Sales tax

Revenues, expenses and assets are recognised net of the amount of sales tax except:

§ where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

§ receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.

g) Government grants

Government grants are recognised where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it is recognised as deferred income.

Where the Group receives non-monetary grants, the asset and the grant are recorded at nominal amounts and released to the income statement over the expected useful life of the relevant asset by equal annual instalments.

h) Pensions and other post-employment benefits

The Group operates defined contribution and defined benefit pension plans which require contributions to be made into separately administered funds. In addition, the Group also provides certain other post-employment benefits to eligible employees who retire before reaching their normal retirement date. These benefits are unfunded.

(i) Defined contribution plans

The costs of providing benefits under defined contribution pension plans are recognised in the income statement on an accruals basis.

(iii) Other post-employment benefits

The Group participates in a number of industry or country specific early retirement schemes which provide eligible employees with the opportunity to retire before they reach normal retirement date. The Group regards such schemes as unfunded postemployment benefits and recognises their costs over the remaining active working life of the employee in accordance with the requirements of IAS 19 Employee Benefits.

Where entitlement to post-employment benefits arises as a result of termination of employment by the Group, the benefit is treated as a termination cost. The expense is recognised in the income statement and the related liability is recorded in the statement of financial position immediately in accordance with the provisions of IAS 37 Provisions, contingent liabilities and contingent assets.

i) Share based payment transactions

Employees (including senior executives) of the Group receive remuneration in the form of share based payment transactions, whereby employees render services as consideration for equity instruments ("equity settled transactions").

The cost of equity settled transactions with employees is measured by reference to the fair value of the equity instruments at the date on which they are granted. The fair value is determined by using an appropriate pricing model, further details of which are given in Note 23.

The cost of equity settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ("the vesting date"). The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The income statement expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is included in employee benefits expense (Note 8.2).

No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

Where an equity settled award is cancelled, it is treated as if it vested on the date of cancellation, and any expense not yet recognised for the awards is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the employee are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award.

Where the terms of an equity settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the share based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

All cancellations of equity settled transaction awards are treated equally.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (see Note 11).

j) Financial instruments - initial recognition and subsequent measurement

(i) Financial assets

Initial recognition and measurement

Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, available for sale financial assets, or as derivatives designated as hedging instruments in an effective hedge. The Group determines the classification of its financial assets at initial recognition depending upon the purpose for which the financial assets were acquired.

All financial assets are recognised initially at fair value plus, in the case of investments other than at fair value through profit and loss, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.

The Group's financial assets include cash and short term deposits, trade and other receivables, loan and other receivables and derivative financial instruments.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss.

Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with changes in fair value recognised in the income statement.

Changes in fair value of foreign exchange forward contracts are recognised within sales and other expenses and changes in fair value of commodity forward contracts are recognised in other expenses.

The Group has not designated any financial assets upon initial recognition as at fair value through profit or loss.

The Group evaluates its financial assets at fair value through profit and loss (held for trading) to determine whether the intent to sell them in the near term is still appropriate. When the Group is unable to trade these financial assets due to inactive markets and management's intent to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets in rare circumstances. The reclassification to loans and receivables, available for sale or held to maturity depends on the nature of the asset. This evaluation does not affect any financial assets designated at fair value through profit or loss using the fair value option at designation.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, they are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the income statement. The losses arising from impairment are recognised in the income statement in finance costs.

Available-for-sale financial investments

Available-for-sale financial investments include equity investments. Equity investments classified as available for sale are those that are neither classified as held for trading nor designated at fair value through profit or loss.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the available-for sale reserve to the income statement in finance costs

Listed investments are measured at the market price at the end of the reporting period. Investments, for which fair values cannot be measured reliably, such as unlisted equities, are reported at cost or at cost less impairment. If the available-for-sale asset is impaired, impairment loss is recognized immediately in profit or loss.

Derecognition

A financial asset is derecognised when:

§ the rights to receive cash flows from the asset have expired; and

§ the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass through arrangement; and either a) the Group has transferred substantially all the risks and rewards of the asset, or b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

(ii) Impairment of financial assets

The Group assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. If there is objective evidence that an impairment loss has incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset's original effective interest rate and if a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

Available for sale financial investments

For available-for-sale financial investments, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. 'Significant' is evaluated against the original cost of the investment and 'prolonged' against the period in which the fair value has been below its original cost. When there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement - is removed from other comprehensive income and recognised in the income statement. Impairment losses on equity investments are not reversed through profit or loss; increases in their fair value after impairment are recognised directly in other comprehensive income.

(iii) Financial liabilities

Initial recognition and measurement

Finance liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, include directly attributable transaction costs.

The Group's financial liabilities include trade payable and other payable, bank overdraft, loans and borrowings, financial guarantee contracts, and derivative financial instruments.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss includes financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships as defined by IAS 39. 

Gains or losses on liabilities held for trading are recognised in the income statement.

The Group has not designated any financial liabilities upon initial recognition as at fair value through profit or loss.

Interest bearing loans and borrowings

After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate (EIR) method amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR Amortisation is included in finance cost in the income statement.

Interest bearing liabilities are classified as non-current liabilities unless they are due to being settled within 12 months after the reporting date.

Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

(iv) Offsetting of financial instruments

Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

(v) Fair value of financial instruments

The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices, without any deduction for transaction costs. For financial instruments not traded in an active market, fair value is determined using appropriate valuation techniques. Such techniques include using recent arm's length market transactions; reference to the current fair value of another instrument, which is substantially the same; discounted cash flow analysis or other valuation models.

k) Derivative financial instruments and hedging

Initial recognition and subsequent measurement

The Group uses derivative financial instruments such as forward exchange contracts, interest rate swaps and commodity forward contracts to hedge its foreign currency risks, interest rate risks and commodity price risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivatives are taken directly to the income statement, except for the effective portion of cash flow hedges, which is recognised in other comprehensive income.

For the purposes of hedge accounting, hedges are classified as:

§ fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or anunrecognised firm commitment (except for foreign currency risk);

§ cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment; or

§ hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the effectiveness of the hedging instrument will be assessed. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an on-going basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Fair value hedges

The Group did not have any fair value hedges or hedges of net investments at 31 December 2012 and 2011.

Cash flow hedges

Cash flow hedges which meet the strict criteria for hedge accounting are accounted for as follows:

§ The effective portion of the gain or loss on the hedging instrument is recognised directly as other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the income statement;

§ Amounts recognised as other comprehensive income are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs.

§ If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if the requirements of hedge accounting are no longer achieved, any cumulative gain or loss previously recognised in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss.

The Group uses currency forward contracts as hedges of its exposure to foreign currency risk in forecasted transactions and firm commitments, but does not apply hedge accounting. The Group uses commodity forward contracts as hedges of its exposure to commodity price risk. Refer to Note 14 for more details.

Current versus non-current classification

Derivative instruments that are not designated and effective hedging instruments are classified as current or non-current and separated into a current or non-current portion based on an assessment of the facts and circumstances.

§ Where the Group does not apply hedge accounting and will hold a derivative as an economic hedge for a period beyond 12 months after the reporting date, the derivative is classified as non-current consistent with the classification of the underlying item.

§ Derivative instruments that are designated as, and are effective hedging instruments, are classified consistent with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and non-current portion only if reliable allocation can be made.

l) Property, plant and equipment

Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the plant and equipment when that cost is incurred, if the recognition criteria are met. When significant parts of property, plant and equipment are replaced, related costs are recognised as assets with specific useful lives and depreciation, respectively. All other repair and maintenance costs are expensed as incurred. The present value of the expected cost for the decommissioning of the asset after its use is included in the cost of the respective asset if the recognition criteria for provision are met.

Depreciation is calculated on a straight line basis over the useful life of the assets. Land and water areas are not depreciated as they are deemed to have indefinite life, but otherwise depreciation is based on the following expected useful lives:

Plant and equipment 2-20 years

Buildings 10-50 years

Other capitalised expenses 5-20 years

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Gains or losses arising from derecognition of an asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised.

The residual values, useful lives and methods of depreciation or property, plant and equipment are reviewed and adjusted prospectively, if appropriate, at each financial year end.

m) Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased item or, if lower, the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the income statement.

Capitalised leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.

n) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. The Group did not have any such assets at 31 December 2012 and 2011 and no borrowing costs were capitalised.

All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

o) Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition.

Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the income statement in the year in which the expenditure is incurred.

The useful lives of intangible assets are assessed to be either finite or indefinite.

Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset.

The straight line amortisation of intangible assets with finite lives is based on the following estimates of useful life:

Customer contracts 5 years

IT software 1-5 years

Patents and licences 5-10 years

Other intangible assets 5-10 years

Intangible assets with indefinite useful lives are not amortised but are tested for impairment annually, either individually or at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised.

Research and development costs

Research and development costs are expensed as incurred. The Group has no development project expenditures that should be recognised as an intangible asset.

p) Inventories

Inventories are valued at the lower of cost or net realisable value.

Costs incurred in bringing each product to its present location and condition are accounted for as follows:

Raw materials Purchase cost on a first in, first out basis.

Finished goods Cost of direct materials and labour and a proportion of work in progress manufacturing overheads based on normal operating capacity but excluding borrowing costs.

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

q) Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash generating unit's (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specified to the asset.

Impairment losses of continuing operations, including impairment on inventories, are recognised in the income statement in expense categories consistent with the function of the impaired asset, except for property which has been previously revalued where the revaluation was taken to other comprehensive income. In this case, the impairment is also recognised in other comprehensive income up to the amount of any previous revaluation.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group makes an estimate of the asset's or CGU's recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognised. The carrying amount after reversal cannot exceed the recoverable amount nor the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement.

The following criteria are also applied in assessing impairment of specific assets:

Goodwill

Goodwill is tested for impairment annually as at 31 December and when circumstances indicate that the carrying value may be impaired.

Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than their carrying amount an impairment loss is recognised. Impairment loss relating to goodwill cannot be reversed in future periods.

r) Cash and short term deposits

Cash and short term deposits in the statement of financial position comprise cash at banks and on hand and short term deposits with an original maturity of three months or less.

For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits as defined above, net of outstanding bank overdrafts.

s) Provisions

General

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Carbon dioxide emissions

The Group receives free carbon dioxide emission allowances as a result of the European Emission Trading Scheme. The allowances are granted on an annual basis and, in return, the Group is required to remit allowances equal to its actual emissions. The Group has adopted a net liability approach to the allowances granted. Therefore, a provision is only recognised when actual emissions exceed the emission allowances granted and still held. Where emission allowances are purchased from other parties, they are recorded at cost and treated as a reimbursement right.

3. Significant accounting judgements, estimates and assumptions

The preparation of the Group's consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.

Key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, where a different opinion could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Impairment of non-financial assets

Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm's length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the asset's performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes.

Share-based payment transactions

The Group measures the cost of equity settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model, including the expected life of the option, volatility and dividend yield and making assumptions about them. The assumptions and models used are disclosed in Note 23.

Taxes

Taxation of gains arising on disposal of shares

During the year ended 31 December 2011, the Group sold a portion of its shareholding in Harvestia and sold its entire interest in the Graphic Papers businesses, realising a profit on both disposals. In preparing its financial statements for the year ended 31 December 2011, the Group assumed that the resulting gains would be exempt from corporate taxes under the substantial shareholder exemptions available to industrial companies in Finland. Details of the assumptions made are set out in Note 3 to the financial statements for the year ended 31 December 2011.

During the year ended 31 December 2012, the Group was informed by Vero, the Finnish tax administration, that it is considered by the tax administration to be a venture capital company and not eligible to take advantage of the substantial shareholder exemptions. Accordingly, Vero considers that the gains arising on the share disposals should be subject to tax and has confirmed assessments for the year ended 31 December 2011 including €3,571,000 of taxes relating to the share transactions.

Following a detailed review of the facts and circumstances by the Group's advisers, including consideration of current tax regulations and official guidance on their implementation, recent case history and the treatment of other tax payers in similar circumstances, the Group considers that it has has strong and defensible arguments against the decision of Vero, which it intends to contest to the fullest extent possible.

While the taxes have been paid to avoid the risk of interest and other penalties, the financial statements for the twelve months ended 31 December 2012 continue to be prepared on the basis that the Group is an industrial company and that the gains arising on the disposals will be exempt from corporate taxes. The taxes assessed by Vero and paid by the Group have not been recognised in the income statement. The taxes paid have been recorded as a non-current financial asset in the balance sheet and full provision has been made against the estimated future costs of the handling the dispute within the results of discontinued operations.

In the event that the Group does not prevail in its appeal against the assessment, then additional taxes of €3,571,000 would have to be recognised within the results of discontinued operations. There would be no impact on the net cash position of the Group, or on the results from continuing operations.

4. Standards issued but not yet effective

Standards issued but not yet effective up to the date of issuance of the Group's financial statements are listed below.

IAS 1 Financial Statement Presentation - Presentation of Items of Other Comprehensive Income

IAS 19 Employee Benefits (Revised)

IAS 28 Investments in Associates and Joint Ventures (as revised in 2011)

IAS 32 Offsetting Financial Assets and Financial Liabilities

IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities

IFRS 9 Financial Instruments: Classification and Measurement

IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

Annual Inprovements May 2012

With the exception of IFRS 11 Joint Arrangements, the standards issued but not yet effective and their interpretations are not expected to have any impact on the Group's financial statements. IFRS 11 Joint Arrangements may have an impact on the way in which the Group's investment in Harvestia Oy is accounted for and this is currently under review.

5. Business combinations

The Group did not make any acquisitions during the years ended 31 December 2012 and 2011.

6. Investment in an associate

The Group has a 45% interest in Harvestia Oy ("Harvestia"), a wood procurement company based in Finland. Harvestia is a private limited company that is not listed on any public exchange.

On 2 January 2012, the Group increased its investment in Harvestia Oy ("Harvestia") from 30% to 45% through the acquisition of a further 15% of the equity of Harvestia for cash consideration of €1,432,000. The purchase of Harvestia shares was financed from the Group's own cash resources.

Prior year information

The Group's interest in Harvestia as at 1 January 2011 was 33%. On 21 December 2010, the shareholders of Harvestia each agreed to sell a portion of their shares to Vapo Oy, a supplier of renewable fuels, bioelectricity, bioheat and environmental business solutions based in Finland. Vapo also agreed to make a further direct investment in the equity of Harvestia. The transactions were completed on 19 January 2011 and the Group received aggregate net proceeds of €2,458,000 in cash from the sale of shares and from the repayment of working capital and equity contributions previously made to Harvestia. This resulted in a gain of €1,869,000 on partial disposal of an associate in the income statement for the year ended 31 December 2011. Following completion of the transactions, the Group's interest in Harvestia decreased to 30%.

Harvestia is accounted for using the equity method. The Group's share of the assets, liabilities, income and expenses of the associated entity at 31 December 2012 and for the year then ended are as follows:

7. Operating segment information

For management purposes, the Group is organised into business units based upon the products and services which it supplies.

The reportable operating segments during the years ended 31 December 2012 and 2011 were as follows:

§ Packaging Papers, which is involved in the production and sale of Nordic semi-chemical fluting for use in premium-grade corrugated-box applications.

§ Graphic Papers, which was disposed of during the year ended 31 December 2011 and is presented as discontinued operations. See Note 10 for further details.

No operating segments have been aggregated to form the above reportable operating segments. The costs of central functions, including the costs of corporate and other central services, are allocated to the reportable operating segments using cost allocation methodologies appropriate to each category of expense and consistent with the methods used in management reporting.

Management monitors the operating results of business units separately for the purpose of making decisions about resource allocation and performance assessment. The principal measure used to monitor and evaluate segmental performance is earnings before interest, tax, depreciation and amortisation ("EBITDA"). The measurement basis for Segment EBITDA excludes the effects of non-recurring or exceptional income or expenditure from the results of the operating segments. It also excludes the effects of equity-settled share-based payments and unrealised gains or losses on financial instruments. Interest income and expenditure are not allocated to segments. Transfer prices between operating segments are on an arm's-length basis in a manner similar to transactions with third parties.

Following the disposal of the Graphic Papers businesses in May 2011, the Group has only one reportable operating segment within continuing operations. The comparative amounts for the year ended 31 December 2011 have been restated to reflect allocation of the total cost of central functions to continuing operations.

Inter-segment revenues are eliminated on consolidation and are not shown as adjustments or eliminations. The Group's share of the profit or loss of Harvestia is reported within the Packaging Papers segment.

Segment operating profit does not include finance income and finance costs.

Capital expenditure consists of additions of property, plant and equipment, intangible assets and investment properties but does not include additions arising directly from business combinations.

Geographical information

Management considers the principal geographic segments based on customer location to be Finland, other countries in the EU, other countries in Europe and the rest of the world.

8. Other income, expenses and adjustments

8.1 Other operating income

8.2 Employee benefits expense

The average total number of employees during the year 2012 was 201 (2011: 196).

8.3 Other operating expenses

8.4 Research and development costs

Research and development costs recognised as an expense in the income statement during the financial year amount to €140,000 (2011: €135,000).

8.5 Finance income

8.6 Finance expenses

8.7 Components of other comprehensive income

9. Income tax

Consolidated income statement

The major components of income tax for the years ended 31 December 2012 and 2011 are:

A reconciliation between the tax expense/(income) and the product of accounting profit multiplied by the domestic tax rate in Finland of 24,5% for the years ended 31 December 2012 and (2011:26%) is as follows:

In calculating income tax and deferred tax for the years ended 31 December 2012 and 2011, the Group has assumed that it is able to take advantage of participation or substantial shareholder exemptions and that gains arising on share disposals will be exempt from corporate taxes. For further details see Note 3.

Deferred tax

Deferred tax in the income statement relates to the following:

The change in the deferred tax liability recognised in other comprehensive income is an income of €25,000 (2011: charge of €652,000) which arises from the revaluation of forward contracts to fair value. The change in net deferred tax liabilities was an increase of €129,000 (2011: increase of €180,000).

Deferred tax in the statement of financial position at 31 December relates to the following:

10. Discontinued operations

On 3 May 2011, the Group announced that it had reached agreement on the sale of the businesses that comprise the Graphic Papers to an acquisition vehicle under the control of Paper Excellence BV, an integrated pulp and paper company registered in the Netherlands. The total consideration for the disposal was €38.5 million before disposal costs, consisting of cash consideration of €32.5 million and the assumption of €6.0 million of debt by the purchaser.

The initial period during which claims could be made by the purchaser under warranties and indemnities provided by the Group expired during the year ended 31 December 2012 without any claims being notified to the Group. Accordingly, the provisions against uncertainties established at the time of disposal have been reassessed and the reduction in the amount of the provisions reported within the gain for the period after tax from discontinued operations. Further details are provided in Note 21.

The impact of discontinued operations on earnings per share in the years ended 31 December 2012 and 2011 was as follows:

Prior year information

In its financial statements for the year ended 31 December 2010, the Group adjusted the carrying amounts of the assets and liabilities of Graphic Papers to their fair value less costs to sell in accordance with the provisions of IAS 36 Impairment of assets and recognised an impairment charge of €22.1 million net of deferred taxes in the income statement. Following completion of the disposal in May 2011, the Group has recognised a gain on the disposal of the discontinued operations of €1.6 million in the income statement for the year ended 31 December 2011.

The financial results of Graphic Papers for the four months ended 30 April 2011 have been consolidated with those of the Group for the year ended 31 December 2011. However, the Group does not have any other businesses in the Graphic Papers operating segment and this segment is no longer reviewed by management. Accordingly, financial information for Graphic Papers has not been separately disclosed in Note 7 - Segmental Information.

The profit/(loss) after tax for the period from discontinued operations was as follows:

The profit/(loss) from trading activities of the Graphic Papers business was as follows:

The major classes of assets and liabilities of Graphics Papers business disposed and the gain arising on the disposal was as follows:

Other costs to sell and provisions against uncertainties include specific provisions for certain expenses which were to be assumed by the Group under the terms of the sale and purchase agreement, together with a general provision of €1.5 million for potential claims under warranties and indemnities provided to the purchaser. As at 13 March 2013, the Group had not received notification of any potential claims.

The net cash inflow to the Group during the period as a result of the disposal was as follows:

€2,000,000 of the cash consideration was held in escrow until November 2012 as security against potential claims under warranties and indemnities provided by the Group to the purchaser of the Graphic Papers businesses. The Group did not receive notification of any potential claims under the warranties and indemnities and the retained amount was released from escrow on 4 November 2012.

The net cash outflow from operating activities incurred by Graphic Papers during the four months ended 30 April 2011 amounted to €855,000.

11. Earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares.

The following reflects the income and share data used in the basic and diluted earnings per share computations:

The weighted average number of shares takes into account the weighted average effect of changes in treasury share transactions during the period.

Authority to repurchase and repurchase of shares

On 26 April 2012, the Annual General Meeting granted authority to the Board of Directors to decide on the repurchase of up to 28,000,000 Powerflute's shares pursuant to Chapter 15, Section 5(2) of the Finnish Companies Act by using funds in the company's unrestricted equity. The proposed amount of shares corresponded to approximately 9.6 % of all shares and votes of the company then in issue. The authority remains effective until 30 June 2013 unless revoked or amended before this date by a General Meeting of Shareholders, and replaces any previous similar authorities granted to the Board of Directors.

In accordance with this authority, the company purchased 5,700,000 of its own shares during the period from 21 May 2012 to 9 November 2012, representing 2.0% of the issued share capital at 1 January 2012.

Authority to issue new shares

On 26 April, 2012, the Annual General Meeting granted authority to the Board of Directors to resolve on the issuance of up to 60,000,000 shares through a share issue or granting of options or other special rights granting entitlement to shares pursuant to Chapter 10, Section 1 of the Finnish Companies Act. This authority may be utilised in one or several issues. The Board of Directors may resolve to give either new shares or shares in the company's possession. The proposed amount of shares corresponded to approximately 20.7 % of all shares and votes of the Company then in issue. This authority provides the right to deviate from the shareholders' pre-emptive subscription right. The authority remains effective until 30 June 2013 unless revoked or amended before this date by a General Meeting of Shareholders, and replaces any previous similar authorities granted to the Board of Directors.

12. Property, plant and equipment, investment properties