Note 24 Financial Instruments

Shareholders’ Equity - Other Comprehensive Income (“OCI”)

Certain derivatives are designated as cash flow hedges and measured to fair value with the fair value movements being recorded in the separate equity category of OCI: Hedging Reserve. The other component of OCI is the Available-for-Sale Reserve, representing the difference between the fair value of investments and their cost (see Note 14). Movements in the year for these two reserves, together with the balances at the year end, are as shown below.

OCI Reserves

	Hedging Reserve
EUR million	Forward & Swap Contracts	Commodity Hedges	Associate Hedge	Total	Available- for-Sale Reserve	Total OCI Reserves

OCI at 1 January 2003	36.7	180.3	-	217.0	16.4	233.4
Net change in OCI in the year	-28.9	-129.9	-	-158.8	40.0	-118.8
OCI at 31 December 2003	7.8	50.4	-	58.2	56.4	114.6

OCI at 1 January 2004
Gains and losses from changes in fair value	11.6	71.5	-	83.1	80.5	163.6
Deferred taxes	-3.8	-21.1	-	-24.9	-24.1	-49.0
	7.8	50.4	-	58.2	56.4	114.6
Net change in OCI in 2004
Gains and losses from changes in fair value	-8.5	-47.6	-	-56.1	2.5	-53.6
Reclassification of losses	19.0	-	-19.0	-	-	-
Deferred taxes	2.7	13.3	-	16.0	-4.1	11.9
Reclassification of deferred taxes	-5.3	-	-	-5.3	-	-5.3
	7.9	-34.3	-19.0	-45.4	-1.6	-47.0
OCI at 31 December 2004
Gains and losses from changes in fair value	22.1	23.9	-19.0	27.0	83.0	110.0
Deferred taxes	-6.4	-7.8	-	-14.2	-28.2	-42.4
Total	15.7	16.1	-19.0	12.8	54.8	67.6

The gain on derivative financial instruments designated as cash flow hedges that was realised from OCI through the Income Statement amounted to EUR 67.4 (EUR 225.4) million.

The hedging reserve includes the Group’s 43.3% (100%) share in an interest rate swap showing a deferred loss of EUR 19.0 (EUR 19.0) million in respect of Stora Enso’s now Associate, but formerly wholly owned subsidiary, Bergvik Skog AB. This amount relates to a fair value loss on Bergvik Skog AB’s cashflow hedge accounted interest rate swap and, in 2004, has been deducted from the equity accounted value of the Group interest in its Associate. In 2003 the gross loss was EUR 19.0 million, against which deferred tax of EUR 5.3 million was provided, however in 2004 the loss EUR 26.4 million is accounted for after tax as the deferred tax belongs to Bergvik Skog AB and not Stora Enso, the interest in the Associate being equity accounted.

The estimated net amount of unrealised gains and losses expected to be reclassified as earnings within the next twelve months amounted to EUR 23.0 (EUR 72.0 million, of which EUR 22.1 (EUR 30.6) million related to currencies and EUR 0.9 (EUR 41.4) million to commodities.

Fair Values of Financial Instruments

Derivative financial instruments are recorded on the Balance Sheet at their fair values, defined as the amount at which the instrument could be exchanged between willing parties in a current transaction, other than in a liquidation or forced sale. The fair values of such financial items have been estimated on the following basis:

• Currency option contract values are calculated using year end market rates together with common option pricing models, the fair values being implicit in the resulting carrying amounts.

• The carrying amounts of foreign exchange forward contracts are calculated using year end market rates and thus they approximate fair values.

• The fair values of interest rate swaps have been calculated using a discounted cash flow analysis.

• Swaption contract fair values are calculated using year end interest rates together with common option pricing models, the fair values being implicit in the resulting carrying amounts.

• Cross currency swaps are fair valued against discounted cash flow analysis and year end foreign exchange rates.

• The fair values of interest rate futures have been calculated by using either discounted cash flow analysis or quoted market prices on future exchanges, the carrying amounts approximating fair values.

• Commodity contract fair values are computed with reference to quoted market prices on future exchanges and thus the carrying amounts approximate fair values.

• The fair values of commodity options are calculated using year end market rates together with common option pricing models, the fair values being implicit in the resulting carrying amounts.

• The fair values of Total Return (Equity) Swaps are calculated using year end equity prices as well as year end interest rates.

• The Group had no outstanding embedded derivatives at either 31 December 2003 or 2004.

Certain gains and losses on financial instruments are taken directly to equity, either to offset Cumulative Translation Adjustments (CTA) or deferred under Other Comprehensive Income (OCI). The remaining fair value movements are taken to the Income Statement as Net Financial Items (Note 7) as shown below.

Nominal Values of Derivative Financial Instruments

As at 31 December

EUR million 2002 2003 2004

Interest Rate Derivatives

Interest rate swaps

    Maturity under 1 year 109.3 113.7 66.5

    Maturity 2-5 years 922.8 1 080.4 953.4

    Maturity 6-10 years 1 088.1 1 439.2 1 469.9

2 120.2 2 633.3 2 489.8

Interest rate options - 23.8 198.4

Total 2 120.2 2 657.1 2 688.2

Foreign Exchange Derivatives

Cross-currency swap agreements 216.5 129.5 102.7

Forward contracts 3 902.4 3 112.5 2 479.8

Currency options - 208.1 588.3

Total 4 118.9 3 450.1 3 170.8

Commodity Derivatives 538.6 477.0 442.7

Equity Swaps 216.5 308.4 359.5

Fair Value Hedge Gains and Losses

Year Ended 31 December

EUR million 2002 2003 2004

Net gains on qualifying hedges 64.2 -24.3 -10.2

Fair value changes in hedged items -62.4 14.5 23.8

Net gains/losses 1.8 -9.8 13.6

Net losses/gains 'on non-qualifying hedges 26.3 -11.2 -6.4

Net gains/losses on Total Return (Equity) Swaps -78.5 20.8 24.9

Net Fair Value Gains in Net Financial Items -50.4 -0.2 32.1

Cash Flow Hedges Not Qualifying for Hedge Accounting

Year Ended 31 December

EUR million 2002 2003 2004

FX forward contacts 41.8 13.7 -0.5

Commodity contracts -1.1 2.6 -0.9

Total hedging ineffectiveness 40.7 16.3 -1.4

Fair Values of Derivative Financial Instruments

	As at 31 December
	2002	2003	2004
EUR million	Net Fair Values	Net Fair Values	Positive Fair Values	Negative Fair Values	Net Fair Values

Interest rate swaps	202.8	106.8	157.1	-5.8	151.3
Interest rate options	-	0.5	1.4	-0.4	1.0
Cross currency swaps	-21.6	-11.0	3.3	-14.9	-11.6
Forward contracts	180.3	172.8	94.7	-5.2	89.5
Currency options	-	0.7	3.2	-1.4	1.8
Commodity contracts	252.4	71.5	28.8	-5.2	23.6
Equity swaps	-55.5	-36.0	21.8	-33.2	-11.4
Total	558.4	305.3	310.3	-66.1	244.2

Positive and negative fair values of financial instruments are shown under Interest-bearing Receivables and Liabilities and Long-term Debt.