Pihlajalinna Oyj

Annual Report (ESEF) • Mar 13, 2023

Vuosikertomus 2022 74370058MTRLEDOCHV67 2022-01-01 2022-12-31 74370058MTRLEDOCHV67 2022-12-31 74370058MTRLEDOCHV67 2021-12-31 74370058MTRLEDOCHV67 2021-12-31 74370058MTRLEDOCHV67 2021-01-01 2021-12-31 74370058MTRLEDOCHV67 2020-12-31 74370058MTRLEDOCHV67 2021-01-01 2021-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2020-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2021-01-01 2021-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2020-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2022-01-01 2022-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2022-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:RetainedEarningsMember 74370058MTRLEDOCHV67 2022-01-01 2022-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2022-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:NoncontrollingInterestsMember 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:IssuedCapitalMember 74370058MTRLEDOCHV67 2020-12-31 ifrs-full:IssuedCapitalMember 74370058MTRLEDOCHV67 2021-12-31 PIH:ReserveofinvestedunrestrictedequityMember 74370058MTRLEDOCHV67 2020-12-31 PIH:ReserveofinvestedunrestrictedequityMember 74370058MTRLEDOCHV67 2022-12-31 ifrs-full:IssuedCapitalMember 74370058MTRLEDOCHV67 2021-12-31 ifrs-full:IssuedCapitalMember 74370058MTRLEDOCHV67 2022-12-31 PIH:ReserveofinvestedunrestrictedequityMember 74370058MTRLEDOCHV67 2021-12-31 PIH:ReserveofinvestedunrestrictedequityMember 74370058MTRLEDOCHV67 2022-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember 74370058MTRLEDOCHV67 2022-01-01 2022-12-31 ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember iso4217:EUR iso4217:EUR xbrli:shares Pihlajalinna REPORT BY THE BOARD OF DIRECTORS AND FINANCIAL STATEMENTS 2022 2022 > REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 2 Report by the Board of Directors for the financial year 1 Jan – 31 Dec 2022 CONTENTS Pihlajalinna’s CEO Joni Aaltonen 3 Pihlajalinna’s strategy 2021–2025 3 Revenue by customer group 4 Seasonal variation 5 Consolidated revenue and result 5 The operating environment 6 Consolidated statement of financial position and cash flow 7 Financing arrangements 8 Acquisitions and capital expenditure 8 Complete and partial outsourcing agreements 9 Research and development 9 Personnel 9 Management Team 10 Board of Directors 10 Shareholders’ Nomination Board 10 Committees nominated by the Board 10 Remuneration of the members of the Board of Directors 10 Board authorisations 11 Auditors and auditing 11 Shares and shareholders 11 Risk management 11 Risks and uncertainties in business operations 12 Flagging notifications 14 Share-based incentive schemes 14 Repurchase of own shares 14 The Board of Directors’ proposal for profit distribution and the Annual General Meeting 2022 14 Pihlajalinna’s outlook for 2022 14 Corporate Governance Statement 15 Statement of non-financial information 15 Events after the financial period 22 Key financial figures 23 Share-related information, tables 23 Quarterly information 24 Calculation of key financial figures and alternative performance measures 25 Reconciliations of alternative performance measures 26 Shares and shareholders 29 Shareholding of the management 30 Signatures to the Report by the Board of Directors and the Financial Statements 80 Auditor’s report 81 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 3 Report by the Board of Directors for the financial year 1 Jan – 31 Dec 2022 Joni Aaltonen, CEO of Pihlajalinna In the year 2022 we focused on expanding our network of private clinics and hospital services and increasing our supply in line with our strategy. We also prepared for the start of the wellbeing services counties’ operations by improving the efficiency of our operations in public services. Pihlajalinna’s revenue increased by a notable 19.5 per cent to EUR 690.5 million (EUR 577.8 in 2021). Organic growth was 6.0 per cent. At the same time, the past year was a challenging period in many ways, with profitability weakening due to the decline of COVID-19 services and the continued high rate of sickness-related ab- sences and high costs in public specialised care. Our adjusted EBITA for the year was EUR 26.7 million (EUR 37.3 million in 2021). We made several acquisitions during the year that supported the growth of supply. In February, Pohjola Hospital became part of Pihla- jalinna. Following the acquisition, Pihlajalinna has a comprehensive service network in high-value added hospital services as well as di- verse emergency and on-call services in all of Finland’s largest re- gional centers. In April, we acquired Etelä-Savon Työterveys and Lääkärikeskus Ikioma. At the beginning of September, we acquired MediEllen, a Kainuu-based provider of private medical services and leased physician and nurse services. The Jyväskylä-based private clinic Seppälääkärit and Seppämagneetti imaging centre were acquired by Pihlajalinna at the beginning of October. In addition, we acquired the Punkkibussi® vaccination business in April. The integration of the acquired operating locations and services was completed, but the synergy benefits were delayed. The synergies will become fully evident in 2023. We will also focus on ensuring econo- mies of scale for the acquired businesses. Pihlajalinna is also clarifying its service portfolio. One example of this is the agreement signed in late 2022 regarding the sale of the Group’s private dental care ser- vices. The plan is to complete the divestment by the end of March 2023. The strong growth of remote services continued, having been acceler- ated by the COVID-19 pandemic. Remote appointments represented 37 per cent of all appointments at the end of the year. We started strategic projects in 2022 to further strengthen our multi-channel ser- vices. The use of remote services is also growing among our occupa- tional healthcare customers. The number of people within the scope of Pihlajalinna’s occupational healthcare services was over 270,000 at the end of 2022. We carried out efficiency improvement measures in public services in 2022 in response to rising costs. We will continue to implement effi- ciency improvement programmes in our complete outsourcing agree- ments. Negotiations are continuing with the wellbeing services coun- ties regarding service referrals and cost sharing in the context of ur- gent and demanding specialised care, for example. Our joint venture agreements in the regions of Pirkanmaa, Central Finland and South Ostrobothnia were transferred under the newly established wellbeing services counties at the turn of the year. The growth of business has also led to an increase in the number of personnel and practitioners. Successful recruitment has enabled us to increase our supply and expand our emergency and on-call services in particular. The changes have been demanding on our personnel, and one of our strategic priorities in 2023 is to promote and develop well- being at work by making job duties clearer and developing leadership. At the end of 2022, Pihlajalinna had 7,016 (6,297) employees and 1,812 (1,070) practitioners. There were many changes in our operating environment in 2022. Rus- sia’s invasion of Ukraine further accelerated the general rise in costs. COVID-19 restrictions were widely lifted during the year. Neverthe- less, COVID-19 and other respiratory infections significantly increased the rate of sickness-related absences among Pihlajalinna’s personnel during the financial year, which caused both costs and operational challenges throughout the year. We cannot be satisfied with the development of our profitability in 2022. Acquisitions increased the Company's indebtedness signifi- cantly, but their financial benefits have not yet been fully realized. We have initiated a number of measures to strengthen our profitabil- ity and financial position. Effective from the beginning of 2023, we in- creased service prices by 5–10 per cent on average and continued to improve operational efficiency in all of the Group’s operations. Pihla- jalinna commenced change negotiations in early January. We are con- sidering the potential partial downscaling, combining or closure of in- dividual operating locations and assessing the structure of the organi- sation. The effects of the measures taken to improve profitability will become evident gradually starting from the first quarter of 2023. In spite of the external uncertainties, we purposefully executed our strategy and were successful in growing our business. I want to take this opportunity to thank all of our stakeholders for the past year, and I especially want to express my gratitude to our personnel. In 2023, we will focus on strengthening our financial position to ensure profit- able growth. Pihlajalinna’s strategy 2023–2025 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 4 Pihlajalinna is one of the leading private social and healthcare service providers in Finland and the Group’s mission is to help people to live better lives. The service selection includes general practitioner and medical specialist services, occupational healthcare and residential services and staffing services. The Group serves private persons, com- panies, insurance companies and public sector entities. Pihlajalinna’s vision is to bring wellbeing to everyone and be impactfully present. Pihlajalinna’s values are ethics, energy and open-mindedness. Strategic priorities 1. The renewal of services for private customers Pihlajalinna will strengthen its multichannel services and consumer business through new service concepts and digital innovation. 2. Cooperation in social and healthcare services Pihlajalinna will engage in close cooperation with the future wellbeing services counties and build a strong market position in public healthcare. 3. Enhancing digitalisation Pihlajalinna has a strong focus on digitalisation in the development of personnel, the customer experience and operational performance. Objectives for the strategy period ● Pihlajalinna offers the most attractive and diverse range of ser- vices. ● Pihlajalinna is the number one choice of consumers and profes- sionals. ● Pihlajalinna services are easy to access and available without delay. ● Revenue growth of EUR 250 million by the end of 2025, using 2021 as the baseline. One third of the growth is expected to arise from the public sector and the rest two thirds from corporate and pri- vate customers. ● Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) over 9 per cent of revenue in the long term. ● Long term target for net debt is less than 3x adjusted EBITDA. ● Distributing at least one-third of the profit for each financial year to shareholders as dividends or capital repayment. Performance indicators The achievement of goals is measured by, for example, financial indi- cators, an increase in the number of appointment times and proce- dures available to customers, and in the Net Promoter Score (NPS), which measures the customer and employee experience. Revenue by customer group Pihlajalinna customer groups are corporate customers, private cus- tomers and public sector customers. ● The Group corporate customers consist of Pihlajalinna occupa- tional healthcare customers, insurance company customers and other corporate customers. The number of people within the scope of the Group’s occupational healthcare services is approxi- mately 200.000 in the corporate customers group. ● The Group private customers are private individuals who pay for services themselves and may subsequently seek compensation from their insurance company. ● The Group public sector customers consist of public sector organi- sations in Finland, such as municipalities, joint municipal authori- ties, congregations, hospital districts and the public administration when purchasing either social and healthcare outsourcing services or residential, occupational healthcare and staffing services. The number of people within the scope of the Group’s occupational healthcare services is over 70.000 in the public sector customers group. January–December 2022 Revenue from corporate customers amounted to EUR 225.3 (137.7) million, an increase of EUR 87.5 million, or 63,5 per cent. Sales to in- surance company customers increased by EUR 57.2 million, or 162.7 per cent. M&A transactions contributed EUR 54.8 million to the in- crease in revenue. Organic growth was EUR 32.7 million, or 23.8 per cent. In the corporate customer group, revenue from COVID19-ser- vices amounted to EUR 7.8 (8.4) million, a decrease of EUR -0.6 mil- lion. The customer volumes of Pihlajalinna’s private clinics increased by 54 per cent year-on-year. Without the effect of M&A transactions, customers volumes would have increased by 21 per cent year-on- year. Revenue from private customers amounted to EUR 103.2 (85.2) mil- lion, an increase of EUR 18.0 million, or 21.1 per cent. M&A transac- tions contributed EUR 15.2 million to the increase in revenue from private customers. Organic growth was EUR 2.8 million, or 3.3 per cent. In the private customer category, revenue from COVID19 -ser- vices amounted to EUR 1.6 (2.3) million, representing a decrease of EUR -0.7 million. The customer volumes of Pihlajalinna’s private clin- ics increased by 30 per cent. Without the effect of M&A transactions, customer volumes would have increased by 15 per cent year-on-year. The streamlining of insurance companies’ financial obligations and di- rect payment practices reduces the reported sales for the private cus- tomer segment. Revenue from the public sector amounted to EUR 435.5 (427.8) mil- lion, an increase of EUR 7.7 million, or 1.8 per cent. M&A transactions increased revenue from public sector by EUR 7.8 million. Revenue from COVID-19 services amounted to EUR 7.3 (28.2) million, repre- senting a decrease of EUR -20.9 million. The factors that compen- sated for the decrease included price adjustments of EUR 3.0 million to complete and partial outsourcing agreements and, in particular, revenue from remote services, residential services and surgical opera- tions for the public sector growing by EUR 12 million. The customer volumes of Pihlajalinna’s private clinics increased by 37 per cent year- on-year. Without the effect of M&A transactions, customer volumes would have been increased by 7 per cent year-on-year. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 5 29 % 14 % 40 % 17 % REVENUE BY CUSTOMER GROUP YTD Q4 2022, % Corporate customers Private customers Complete and partial outsourcing Other services to public sector 138 225 85 103 301 304 127 132 2021 YTD 2022 YTD REVENUE BY CUSTOMER GROUP YTD Q4, EUR MILLION Other services to public sector Complete and partial outsourcing Private customers Corporate customers +64 % +21 % +1 % +4 % 578 690 +19,5 % Seasonal variation Pihlajalinna’s business operations are to a certain extent influenced by seasonal fluctuations. Pihlajalinna’s complete outsourcing for so- cial and healthcare services and other fixed-price invoicing is accom- panied by a steady period of recognition of revenue as income. Dur- ing the summer holidays, especially in July, staff costs related to such agreements are reduced and profitability improves mainly due to wage accruals. On the other hand, service demand by Pihlajalinna’s private and corporate customers is lower and profitability is weaker during holiday seasons, especially in July–August and December. At the quarterly level, seasonal fluctuations have historically had a posi- tive effect on profitability for the third quarter of the year. Consolidated revenue and result January–December 2022 Pihlajalinna’s revenue totalled EUR 690.5 (577.8) million, an increase of EUR 112.7 million, or 19.5 per cent. Revenue from COVID-19 ser- vices came to EUR 16.7 (38.9) million, representing a decrease of EUR -22.2 million. Organic growth was EUR 34.8 million, or 6.0 per cent. Organic growth would have been EUR 59.4 million, or 10.3 per cent, excluding the effect of COVID-19 services and the EUR -2.4 million ad- justment to revenue in accordance with the District Court decision on the case between Jämsän Terveys Oy and the City of Jämsä. M&A transactions accounted for EUR 77.9 million, or 13.5 per cent, of the growth in revenue. Organic revenue growth during the financial year was based on the strong growth of supply throughout the network of operating loca- tions. The organic growth of appointments, surgical operations, re- mote services and occupational health services has compensated for the significant decline of COVID-19 services. Some 37 (36) per cent of all customer appointments, excluding com- plete outsourcing arrangements, vaccinations and COVID-19 testing, took place via remote services during the financial year. The number of remote appointments increased by 40 per cent year-on-year. The total number of appointments increased by 33 per cent. January-December 2022 EUR million 2022 2021 change change % Corporate customers 225.3 137.7 87.5 63.5 % of which insurance company customers 98.4 35.1 63.3 180.2 % Private customers 103.2 85.2 18.0 21.1 % Public sector 435.5 427.8 7.7 1.8 % of which complete and partial outsourcing agreements 303.9 300.8 3.1 1.0 % of which staffing 24.8 26.1 -1.3 -4.9 % of which occupational healthcare and other services 106.8 100.9 5.9 5.8 % Intra-Group sales -73.5 -73.0 -0.5 0.7 % Total consolidated revenue 690.5 577.8 112.7 19.5 % REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 6 EBITDA was EUR 54.4 (62.6) million, a decrease of EUR -8.2 million, or -13.1 per cent. Adjusted EBITDA was EUR 64.2 (65.3) million, a de- crease of EUR -1.1 million, or -1.7 per cent. EBITDA adjustments to- talled EUR 9.8 (2.7) million. The adjustment recognised due to the outcome of the District Court hearing concerning the dispute be- tween Jämsän Terveys Oy and the City of Jämsä had an effect of EUR -4.7 million on EBITDA. This item was treated as an adjustment item. Other adjustment items included EUR 1.8 million in integration ex- penses related to M&A transactions, EUR 1.1 million in IFRS 3 ex- penses, EUR 0.7 million in retrospective cost adjustments with no cash flow effect, and EUR 1.2 million in other expense items. Employee benefit expenses were exceptionally high during the finan- cial year. The share of various respiratory infections in the sickness- related absences among Pihlajalinna’s personnel increased in particu- lar. Substitutes and recruitment services have been used to compen- sate for shortages in personnel. The increased sickness-related ab- sences are estimated to have had an effect of approximately EUR 4.0 million on employee benefit expenses for the financial year. Profitability has been significantly weakened by the decline of COVID- 19 services. Furthermore, the growth of supply has increased costs in occupational health services and private clinic operations. The profit- ability of surgical operations and remote services was higher than in the previous financial year due to higher volumes. The costs of com- plete and partial outsourcing arrangements remained at a high level, but profitability improved during the financial year due to efficiency improvement programmes, price adjustments stipulated by outsourc- ing agreements, COVID-19 cost compensation and refunds of the South Ostrobothnia Hospital District’s service fees. Depreciation, amortisation and impairment amounted to EUR 45.5 (34.7) million. Adjustments to depreciation, amortisation and impair- ment amounted to EUR -0.1 (-0.3) million. Depreciation of intangible assets amounted to EUR 7.7 (6.7) million, of which depreciation re- lated to purchase price allocations amounted to EUR 2.7 (3.0) million. Depreciation, amortisation and impairment of property, plant and equipment amounted to EUR 10.6 (9.2) million, and depreciation and impairment of right-of-use assets totalled EUR 27.2 (18.8) million. The acquisition of Pohjola Hospital increased Pihlajalinna’s deprecia- tion of right-of-use assets, i.e. leased business premises, by EUR 6.6 million. Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) was EUR 26.7 (37.3) million. The adjusted EBITA margin was 3.9 (6.5) per cent. Adjustments to EBIT amounted to EUR 9.7 (2.4) million. Pihlajalinna’s EBIT was EUR 8.9 (27.9) million, a decrease of EUR -19.0 million. Adjusted EBIT amounted to EUR 18.6 (30.3) million, a de- crease of EUR -11.7 million. The Group’s net financial expenses amounted to EUR -7.4 (-3.7) mil- lion. The acquisition of Pohjola Hospital increased Pihlajalinna’s inter- est expenses associated with leases by EUR 1.8 million. The financing rearrangements in March and the waiver expenses paid in the latter part of the year due to a temporary increase to financial covenants caused non-recurring financial expenses totalling EUR 0.8 million. M&A transactions have also increased Pihlajalinna’s debt and interest expenses. Profit before taxes amounted to EUR 1.5 (24.2) million. Taxes in the income statement amounted to EUR 6.1 (-5.1) million. The Finnish Tax Administration granted Pihlajalinna the right to de- duct Pohjola Hospital Ltd’s confirmed tax losses for previous fiscal years and confirmed tax losses for the fiscal years 2021–2022. The deferred tax asset in question, amounting to EUR 6.3 million, was rec- ognised through the income statement during the financial year, as the plan concerning the use of tax losses has now been completed. Profit came to EUR 7.7 (19.1) million. Earnings per share (EPS) was EUR 0.42 (0.89) . The operating environment COVID-19 and queues for treatment The COVID-19 epidemic continued to have extensive impacts on healthcare in Finland. In late summer, the Finnish Institute for Health and Welfare announced that the COVID-19 pandemic was moving on to an endemic phase and that the virus was likely to occur from one year to the next in the form of recurring epidemics characterised by seasonal variation. The healthcare system needs to adapt to the new situation so that the provision of other essential care will not suffer. This requires resources from both the public and private sectors. The queues for non-urgent specialised care continued to grow. In the autumn, over 152,000 customers were waiting for access to non-ur- gent specialised care at the hospitals operated by the hospital dis- tricts. Labour availability and the development of wages in the social and healthcare sector The shortage of social and healthcare professionals is one of the big- gest issues facing Finnish society, and labour availability has deterio- rated substantially over the past few years. The Ministry of Finance forecasts that, by 2035, the social and healthcare sector will need 70,000 more employees compared to the current situation. The increase to the staffing requirement for round-the-clock nursing units for the elderly to 0.7 employees per customer, which has been decided on by the Parliament, was postponed to December 2023. It has been estimated that the number of nurses in the sector needs to be increased by over 3,400 in order to satisfy the higher staffing re- quirement by the time the change enters into effect. For service pro- viders in the social and healthcare sector, the labour issues are re- flected in recruitment challenges. Consequently, professionally skilled personnel are increasingly viewed as a key resource by companies in the industry. The significance of successful recruitment, effective co- operation with educational institutions and international recruitment projects, for example, continued to grow. The collective agreement for the healthcare service sector (TPTES) en- tered into effect in May 2022. The agreement is valid for two years. According to the agreement, individual monthly wages and pay scales were raised by 2 per cent at the beginning of October 2022, with a further general increase of at least 1.9 per cent to take effect on 1 June 2023. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 7 The collective agreement for the private social services sector (SOSTES) is valid for a period of 1+1 years, and that agreement also entered into effect in May 2022. Wages were increased by 2 per cent at the be-ginning of September 2022. Pay scales were also subject to lower boundary increases of 0.8 per cent targeted at the minimum wages of the wage groups. Wage increases for 2023 will be deter- mined by the wage increases in the benchmark sectors, but the in- crease in wages will be at least 1.9 per cent. After an industrial dispute, municipal and wellbeing services county employers and the nurse unions Tehy and Super approved a proposal for a new collective agreement on 3 October 2022. The agreement, together with the municipal sector agreement approved earlier in the summer, will increase the earnings of the personnel by at least 13 per cent on average during the agreement period 2022–2024. The SOTE collective agreement covers some 180,000 employees whose annual labour costs amount to approximately EUR 8.6 billion. Economic forecasts and inflation Russia began a war of aggression in Ukraine in February 2022. The war has had a major impact on the economy in the euro area as a whole. Economic growth has slowed, inflation has accelerated and market interest rates have increased. According to Statistics Finland, the year-on-year increase in consumer prices in December 2022 was mainly driven by the higher price of electricity, the average interest rate of housing loans and the interest rates of consumer credit, and higher diesel prices. According to a forecast published by the Bank of Finland in December 2022, the Finnish economy will drift into a slight recession in 2023, with GDP contracting by 0.5 per cent. The forecast projects a short-lived recession followed by a recovery of economic growth to 1.1 per cent in 2024. The general uncertainty has weakened consumers’ purchasing power and reduced investment. During the year under review, consumer confidence fell to the lowest level on record. The consumer confi- dence indicator’s balance figure was -18.5 in December 2022, com- pared to -3.5 at the corresponding time last year. Russia’s invasion of Ukraine has also increased the likelihood of cyber attacks. Wellbeing services counties and ensuring the provision of so- cial and healthcare services for the population The year 2022 was characterised by preparations for the wellbeing services counties starting their operations at the beginning of 2023. The wellbeing services counties’ expectations for private service pro- viders are particularly focused on agile and scalable service models as well as digital solutions that are easy to integrate with the counties’ own platforms. Cooperation between the private and public sectors is essential as the wellbeing services counties started their operations under challenging circumstances. The ageing population, the reduced level of physical activity among people in general and lifestyle changes are reflected in the higher in- cidence of illnesses. The number of people over the age of 75 will in- crease by 250,000 in Finland during this decade. This will have a di- rect impact on service demand and costs: the costs of social and healthcare services for the 75–84 age group are approximately three times higher than the population average. For people over the age of 85, these costs are nearly seven times higher than the population av- erage. The crises affecting society also increased general uncertainty among people, which creates challenges to the promotion of overall health and wellbeing. Mental health problems have increased dramatically. Half of all disability pensions are now granted for reasons related to mental health. Employers’ social responsibility is growing in signifi- cance, and cooperation with pension insurance companies is increas- ingly important. Efforts to address cost issues and cost responsibilities in the welfare state must increasingly focus on maintaining health and wellbeing and the prevention of problems. Consolidated statement of financial position and cash flow Pihlajalinna Group’s total statement of financial position amounted to EUR 661.6 (457.1) million. The growth is mainly attributable to busi- ness acquisitions. Consolidated cash and cash equivalents amounted to EUR 13.1 (4.3) million. The Group’s interest rate swap fair value was EUR 5.1 million at the end of the financial year. Net cash flow from operating activities during the financial year amounted to EUR 64.9 (56.9) million. Taxes paid amounted to EUR - 6.9 (-2.6) million. The change in net working capital was EUR 16.8 (- 3.3) million. Working capital totalling EUR 24.2 (14.7) million was re- leased from trade and other payables. Working capital amounting to EUR -6.0 (-16.8) million was tied up in trade receivables and other re- ceivables and EUR -0.8 (-0.3) million in inventories. Changes in provi- sions tied up EUR -0.7 (-0.9) million in working capital. Net cash flow from investing activities totalled EUR -83.4 (-32.1) mil- lion for the financial year. Acquisitions of subsidiaries had an impact of EUR -52.3 (-16.4) million on net cash flow from investing activities. Investments in tangible and intangible assets amounted to EUR -29.0 (-14.8) million, and the proceeds from the disposal of tangible assets amounted to EUR 0.4 (0.5) million. Pihlajalinna redeemed the clinical equipment lease liabilities of Pohjola Hospital EUR 5.8 million on the acquisition date 1 February 2022. During the financial year the Group has invested an extraordinary amount in expanding and renewing its service network. The Group’s cash flow after investments (free cash flow) was EUR - 18.6 (24.9) million for the financial year. Net cash flow from financing activities during the financial year to- talled EUR 27.4 (-33.9) million. The change in financial liabilities, in- cluding changes in credit limits, amounted to EUR 75.2 (-1.6) million. Payments for financial lease liabilities amounted to EUR -29.0 (-19.8) million, and interest paid and other financial expenses amounted to EUR -8.3 (-4.0) million. Pihlajalinna rearranged its long-term debt fi- nancing in March 2022. A total of EUR -1.8 (-0.4) million in dividends was paid to non-controlling interests. Pihlajalinna Plc distributed in April dividends of EUR -6.8 (-4.5) million for the financial year 2021. The Group has acquired its own shares for its incentive scheme and remuneration of the Board of Directors in the amount of EUR -1.5 (- 0.6) million. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 8 The Group’s gearing was 313.8 (158.8) per cent. Interest-bearing net debt amounted to EUR 385.7 (194.7) million, an increase of EUR 190.9 million. The M&A transactions increased the amount of finan- cial debts by EUR 56.1 million. Also, the M&A transactions increased the amount of Pihlajalinna’s lease liabilities by EUR 129.5 million. Return on capital employed was 2.3 (8.8) per cent and return on eq- uity was 6.2 (16.1) per cent. Financing arrangements Pihlajalinna rearranged its long-term debt financing with a sustaina- bility-linked financing arrangement on 22 March 2022. The EUR 200 million unsecured financing arrangement, for three years with an op- tion for a further two years, was concluded with Danske Bank, OP Corporate Bank and Swedbank (the creditor banks). The financing comprises a long-term loan of EUR 130 million and a revolving credit facility of EUR 70 million for general financing needs and acquisitions. It also includes an opportunity to later increase the total amount by EUR 100 million (to EUR 300 million), subject to separate decisions on a supplementary loan from the funding providers. The financing arrangement includes the customary financial cove- nants concerning leverage (ratio of net debt to pro forma EBITDA) and gearing. IFRS 16 lease liabilities are not taken into account in the calculation of the covenants (Frozen GAAP). The loan margin of the fi- nancing is additionally linked to Pihlajalinna’s annual sustainability objectives related to patient satisfaction (NPS), employee engage- ment (eNPS) and access to surgical treatment within the target time. At the end of the financial year, the sustainability targets linked to the financing arrangement caused no changes in the loan margins. Due to the acquisition of Pohjola Hospital Ltd, Pihlajalinna and the creditor banks agreed on increasing the gearing covenant to 140 per cent and the leverage covenant to 4.00 for 2022. Pihlajalinna and the creditor banks agreed on a temporary adjust- ment to the covenants of the financing arrangement twice in the lat- ter part of the year. According to the acquired waivers, the leverage cove-nant was set at 5.5 for the fourth quarter of 2022, 4.5 for the first quarter of 2023, and 4.0 for the second quarter of 2023. For the fourth quarter of 2022 and the first three quarters of 2023, gearing must not exceed 140 per cent. The financing arrangement’s original gearing covenant of 115 per cent will enter into effect on the fourth quarter of 2023. Starting from the beginning of the third quarter of 2023, the leverage covenant according to the financing arrangement will be 3.75. At the end of the financial year, leverage in accordance with the fi- nancing arrangement stood at 5.23 and gearing was 139.95 per cent. The Group met the set covenants on 31 December 2022. Had the Group’s profit after taxes been lower by approximately EUR 40 thou- sand, the gearing covenant would have been breached. At the same time, however, the company’s interest rate swap had a fair value of EUR 5.1 million on the financial statements date. Had the interest rate swap been sold on the financial statements date, gearing would have fallen to 136.0 per cent and the leverage ratio would have fallen to 5.08. Breaching the covenants can lead to the financing arrange- ment falling due. Under the waiver agreement, the highest margin level of the financ- ing arrangement increased to one percent units from the beginning of 2023 until the third quarter of the year. The increase to the highest margin level and the other waiver terms will be discontinued by the end of 2023. If the company proposes to remain below the original covenant levels for the next 12 months, the additional provisions de- scribed above may be discontinued earlier. The Group has credit limit agreements valid until further notice, total- ling EUR 10 million. The notice period of the credit limit agreements is one month. At the end of the financial year, Pihlajalinna had EUR 43 million in unused committed credit limits. Furthermore, an additional credit limit of EUR 100 million, which is subject to a separate credit decision, is unused. The company has an interest rate swap agreement with a nominal value of EUR 65 million, which is used to convert the interest on a floating rate financing arrangement to a fixed rate. Cash flow hedge accounting is applied to the interest rate swap agreement, which means that the effective portion of the change in fair value is recog- nised in other comprehensive income. The interest rate swap starting date is in March 2023 and it is valid until 25 March 2027. Acquisitions and capital expenditure Gross investments, including acquisitions, amounted to EUR 234.5 (44.8) million. Gross investments in M&A transactions including right- of-use assets (e.g. lease commitments) amounted to EUR 176.6 (44.8) million. The share of lease commitments amounted to EUR 106.6 mil- lion. The Group’s gross investments in property, plant and equipment and intangible assets, which consisted of development investments, additional investments and replacement investments required for growth, amounted to EUR 25.4 (13.8) million. Pihlajalinna redeemed Pohjola Hospital’s clinical equipment leasing liabilities for EUR 5.8 million on the acquisition date 1 February 2022. Gross investments in connection with the opening of new units amounted to EUR 6.1 (1.1) million. Gross investments in right-of-use assets amounted to EUR 26.5 (9.8) million, including investments in the opening of new units. Investment commitments for the Group’s development, additional and replacement investments amounted to approximately EUR 3.5 (2.0) million. The investment commitments are related to additional and replacement investments in clinical equipment, change of prem- ises and information system projects. On 1 February 2022, Pihlajalinna acquired the entire share capital of Pohjola Hospital Ltd from Pohjola Insurance Ltd. The net debt-free purchase price, paid in cash, was EUR 35.2 million. Pihlajalinna acquired, on 1 April 2022, the entire share capital of Etelä-Savon Työterveys Oy and the majority interest of Lääkärikeskus Ikioma Oy. In addition, on 1 April 2022, Pihlajalinna acquired the Punkkibussi ® business from Saaristolääkärit Oy. On 1 September 2022, Pihlajalinna acquired a majority interest in Me- diEllen Oy. The deed of sale concerning the acquisition of the entire share capital of Seppälääkärit Oy and Seppämagneetti Oy was completed on 1 Oc- tober 2022. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 9 Research and development Increases to intangible assets totalled EUR 7.4 (4.0) million during the financial year. During the financial year 2022 new digital appointment booking system was released together with general improvements regarding the usage and appearance of the system. A wider range of remote services has been added for example with new chat services and by renewing transaction paths. Pihlajalinna Health App (Ter- veyssovellus) -mobile application has received new appearance and significant content improvements have been made to the application. The service offering through the occupational health portal was fur- ther expanded for example with digital workplace survey, secure messaging and reporting. In hospital business a new ERP system was deployed in surgical operations. A new PihlajalinnaPRO-mobile appli- cation was released for healthcare professionals working in Pihla- jalinna. Other deployments were also made for information security, document management system and marketing related solutions and new imaging archive and communications system (PACS) was taken into use. During the financial year 2023 private customer services development will be continued in all channels in digital appointment booking sys- tem as well as in the remote services. New features will be added into our portal for the occupational healthcare care customers to benefit and application to support work ability will be developed . New features are developed continually in PihlajalinnaPRO-mobile application based on feedback received and needs of the healthcare professionals. The ERP system in surgical op- erations is developed more for example in reporting related to insur- ance company customers. A new ERP system will be deployed for HR management. Personnel At the end of the financial year, the number of personnel was 7,016 (6,297), an increase of 719 persons, or 11 per cent. The Group per- sonnel averaged 5,167 (4,746) persons as full-time equivalents, an in- crease of 421 persons, or 9 per cent. The Group employee benefit ex- penses totalled EUR 296.6 (255.2) million, an increase of EUR 41.4 million, or 16 per cent. KIRJANMERKKI Complete and partial outsourcing agreements Company Pihlajalinna’s holding 31 Dec 2021 Pihlajalinna’s holding 30 Jun 2022 First year of service production under the current contract Duration of contract (years) Jokilaakson Terveys Oy 90% 90% internal service provision internal service provision Jämsän Terveys Oy 51% 51% 2015 10 Kuusiolinna Terveys Oy 97% 97% 2016 15 Mäntänvuoren Terveys Oy 91% 91% 2016 15 Kolmostien Terveys Oy 96% 96% 2015 15 Bottenhavets Hälsa Ab - Selkämeren Terveys Oy 75% 75% 2021 15–20 years More information on the profitability of complete outsourcing agreements is presented in this report in the section Items that may, according to the management estimate, influence the profitability of complete outsourcing agreements with a delay. Summary of the revenue and profitability of complete and partial outsourcing agreements (intra -Group sales eliminated): Complete and partial outsourcing agreements 2022 2021 INCOME STATEMENT Revenue, EUR million 281.4 277.0 EBITDA, EUR million 6.0 6.6 EBITDA, % 2.1 2.4 Adjusted EBITDA, EUR million 11.5 6.7 Adjusted EBITDA, % 4.1 2.4 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), EUR million 8.8 4.1 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), % 3.1 1.5 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 10 Acquisitions increased the number of personnel by approximately 450 persons year-on-year. In Pihlajalinna’s network of operating loca- tions, the number of personnel increased by approximately 150 per- sons. The number of personnel in residential services and complete outsourcing arrangements increased by just over 100 persons. Employee benefit expenses were exceptionally high during the finan- cial year. Sickness-related absences among Pihlajalinna’s personnel were increased particularly by various respiratory infections. Sick- ness-related absences increased by two percent units year-on-year. Substitutes and recruitment services have been used to compensate for shortages in personnel. Increasing supply and strengthening the company’s governance have also contributed to higher employee ex- penses. Pihlajalinna is assessing its operations and organisation. On 10 Janu- ary 2023, the company announced it will commence change negotia- tions. The aim is to use open dialogue with personnel representatives to find long-term solutions for the company. The company is also con- sidering the potential partial downscaling, combining or closure of in- dividual operating locations. The change negotiations concern the network of private clinics, re- gional management and the Group's general management. Approxi- mately 650 persons are within the scope of the functions in question. With a few minor exceptions, the negotiations do not concern healthcare professionals engaged exclusively in clinical work with cus- tomers. Other areas excluded from the negotiations include remote services, digital development, the medical unit, recruitment and pub- lic services functions, with the exception of the Group’s general ad- ministration. According to a preliminary estimate, the negotiations may lead to a reduction of 40–60 positions in Pihlajalinna, and the administrative duties of 30–40 employees may be discontinued or reduced. The provision of health advisory services for the ports of Helsinki ended on 3 April 2022. The change negotiations concerning those op- erations concerned 40 persons. In February 2022, change negotia- tions were commenced to improve the efficiency of operations in Jä- msän Terveys, concerning all of the personnel, and in Jokilaakson Ter- veys, concerning approximately 50 persons. The change negotiations in Jämsä did not lead to reductions in personnel. Change negotiations concerning operational efficiency improvements in Kolmostien Ter- veys commenced in March 2022 and were completed in May. The change negotiations did not lead to reductions in personnel. Management Team CEO Joni Aaltonen serves as the Chairman of the Management Team. The Management Team also includes CFO Tarja Rantala, CLO Marko Savolainen, CIO Antti-Jussi Aro, CMO Sari Riihijärvi, CCO Sari Nevan- linna, COO Public Services Eetu Salunen, COO Private Clinic and Hospi- tal Services Timo Harju and Chief People and Culture Officer Kati Raassina. Board of Directors The Annual General Meeting on 13 April 2022 resolved that the num- ber of the members of the Board of Directors shall be seven members instead of the previous six. Hannu Juvonen, Mika Manninen, Leena Niemistö, Kati Sulin, Seija Turunen and Mikko Wirén were re-elected to serve as members of the Board of Directors until the next Annual General Meeting. Heli Iisakka was elected as a new Board Member. The Annual General Meeting elected Mikko Wirén as the Chairman of the Board and Leena Niemistö as the Vice-Chairman of the Board. Kati Sulin resigned from the Board of Directors as of 12 June 2022. Shareholders’ Nomination Board The Shareholders’ Nomination Board is comprised of the following representatives: ● Juha Koponen, Group Director and Chairman of the Board of Direc- tors, LocalTapiola General Mutual Insurance Company and Local- Tapiola Mutual Life Insurance Company ● Mikko Wirén, Managing Director, MWW Yhtiö Oy ● Antti Kuljukka, CEO, Fennia Mutual Insurance Company ● Hanna Hiidenpalo, deputy CEO, Elo Mutual Pension Insurance Company Committees nominated by the Board Pihlajalinna Plc Board of Directors appointed the following members to its committees at its constitutive meeting on 13 April 2022: ● Audit Committee: Seija Turunen (chairman), Mika Manninen, Hannu Juvonen and Heli Iisakka ● People Committee: Mikko Wirén (chairman), Leena Niemistö, Kati Sulin (until 12 June 2022) and Hannu Juvonen (from 13 June 2022 onwards) It was agreed that all members of the Board of Directors may join any of the committee meetings. Remuneration of the members of the Board of Directors The Annual General Meeting of 13 April 2022 resolved that the remu- neration of the Chairman of the Board of Directors will remain un- changed and that the remuneration is increased for Vice-Chairman of the Board of Directors and the Chairman of the Audit Committee along with the members of the Board of Directors. The following an- nual remuneration will be paid to the members of the Board of Direc- tors elected for the term of office ending at the 2023 Annual General Meeting: EUR 250,000 per year to the full-time Chairman of the Board of Directors, EUR 39,000 per year to the Vice-Chairman and to the Chairman of the Audit Committee, and EUR 26,000 per year to the other members. The AGM resolved that annual remuneration shall be paid in com- pany shares and in cash, with approximately 40 per cent of the remu- neration used to acquire shares in the name and on behalf of the members of the Board of Directors, and the remainder paid in cash. The remuneration could be paid either entirely or partially in cash if the member of the Board of Directors was, on the day of the AGM, 13 April 2022, in possession of over EUR 1,000,000 worth of company shares. The company was responsible for the expenses and transfer tax arising from the acquisition of the shares. The share-based remu- neration can be paid by distributing company’s own shares to the members of the Board of Directors or by acquiring shares directly on behalf of the board members after three weeks of the release of the REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 11 interim report for 1 January–31 March 2022. If this is not possible for legal or other statutory reasons, such as taking insider regulations into account, at the earliest possible time after this. Alternatively, the remuneration is then paid in cash. If the term of a Board member ends before the Annual General Meeting of 2023, the Board is enti- tled to decide on the possible recovery of the remuneration in a man- ner it deems appropriate. The AGM decided that each Board member shall be paid a meeting fee of EUR 500 for each Board and Committee meeting. Reasonable travel expenses will also be reimbursed to the members of the Board in accordance with the company’s travel policy. Board authorisations The Annual General Meeting of 13 April 2022 authorised the Board of Directors to decide on the acquisition of a maximum of 2,061,314 shares, which is approximately 9 per cent of the Group’s current number of shares. Own shares may be repurchased on the basis of the authorisation only by using unrestricted equity. Targeted share acquisition is possible. The authorisation is effective until the next An- nual General Meeting, or until 30 June 2023 at the latest. The Annual General Meeting also authorised the Board of Directors to decide on a share issue and other special rights conferring an entitle- ment to shares under Chapter 10, Section 1 of the Limited Liability Companies Act. The number of shares to be issued cannot exceed 3,091,971 shares, which corresponds to approximately 14 per cent of all the shares in the Group. The authorisation concerns both the issu- ance of new shares and the sale or transfer of the Group’s own shares. The authorisation permits a targeted share issue. The authori- sation is effective until the next Annual General Meeting, or until 30 June 2023 at the latest. Auditors and auditing At Pihlajalinna’s Annual General Meeting held on 13 April 2022, KPMG Oy Ab, a firm of authorised public accountants, was elected as the company’s auditor for the financial year 1 January–31 December 2022. Lotta Nurminen, APA, is the principal auditor. Shares and shareholders At the end of the financial period, Pihlajalinna Plc’s share capital en- tered in the Trade Register amounted to EUR 80,000 and the total number of shares was 22,620,135, of which 22,549,644 were out- standing and 70,491 were held by the company. The company has one share series, with each share entitling its holder to one vote at the Annual General Meeting. All of the outstanding shares bestow their holders with equal rights to dividends and other distribution of the company’s assets. At the end of the review period, the company had 15,811 (15,126) shareholders. A list of the largest shareholders is available on the company’s investor website at investors.pihla- jalinna.fi. The trading code for the shares on the Nasdaq Helsinki main market is PIHLIS. Pihlajalinna Plc has been classified as a Mid Cap company in the Healthcare sector. Risk management In its risk management, Pihlajalinna’s aim is to operate as systemati- cally as possible and incorporate risk management in normal business processes. Furthermore, the group invests in management of occupa- tional safety and health risks and in quality management systems like ISO9001. Pihlajalinna’s Risk Management Policy defines goals of risk management, risk management principles, operating methods and responsibilities. Internal risk reporting is included in the regular business reporting as well as in business planning and decision-making. The material risks and their management are reported to stakeholders regularly and, when necessary, on a case-by-case basis. In 2022, Pihlajalinna reviewed and further specified the previously de- veloped and implemented comprehensive Enterprise Risk Manage- ment process, which involves classifying risks according to the 2021 strategy which are profitable growth, quality and impactfulness, cus- tomer and personnel experience and digitalisation of Pihlajalinna. In- side these themes risks are reviewed as strategic, operational and fi- nancial risks. In addition, the comprehensive risk management pro- cess includes a review of sustainability risks, which are reported as part of the section Statement of non-financial information. Under the profitable growth has been gathered strategic and busi- ness risks that refer to uncertainty related to the implementation of the Group’s short-term and long-term strategy. An example is struc- tural changes in society that can affect Pihlajalinna as a private pro- vider of social and healthcare services. In addition, risks related to profitability, business transactions, financing and other financial activ- ities, such as contractual partnerships, are processed under the theme. Share-related information, outstanding shares 2022 2021 No. of shares outstanding at end of period 22,549,644 22,594,235 Average no. of shares outstanding during period 22,560,271 22,589,383 Highest price, EUR 13.18 12.98 Lowest price, EUR 8.48 9.26 Average price, EUR ¹⁾ 11.06 11.18 Closing price, EUR 8.52 12.64 Share turnover, 1,000 shares 3 770 6 929 Share turnover, % 16.7 30.7 Market capitalisation at end of period, EUR million 192.1 285.6 ¹⁾ average rate weighted by trading level REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 12 Under the theme of quality and impactfulness have been gathered comprehensive patient safety, operational quality and safety, as well as risks related to the uninterrupted continuity of operations, includ- ing unforeseen and surprising information security risks. Pihlajalinna has identified under the theme of customer and person- nel satisfaction, in particular, the risks related to the availability and retention of personnel, as well as the risks related to work ability and sickness absence. In addition, risks related to the company's values, ethics and uniform operating methods are taken into account under this theme. The use of digitalisation and the risks associated with the strong growth of multi-channel transactions have been gathered under to the theme of digitalisation of Pihlajalinna. In addition for example the compromise of risks related to data security or protection may lead to financial losses, claims for compensation and loss of reputation. The goal of Pihlajalinna risk management is to promote the achieve- ment the Group’s strategic and operational targets, shareholder value, the Group’s operational profitability and the realisation of re- sponsible operating methods. Risk management seeks to ensure that the risks affecting the company’s business operations are known, as- sessed and monitored as well as taking care of practical measures and real-time monitoring to anticipate and mitigate risks. The Group and operative management are responsible for risk man- agement according to reporting responsibilities. In addition, risk man- agement specialists guide and develop the group’s risk management. The Group Management Team regularly discusses the key risks re- lated to the Group’s business operations. Everyone working at Pihla- jalinna must also know and manage risks related to their responsibili- ties. The internal audit function evaluates the appropriateness and performance of the Company’s risk management as part of its annual audit plan. Risks and uncertainties in business operations Pihlajalinna’s operations are affected by strategic risks, operational risks, financial risks and damage risks. In its risk management, Pihla- jalinna’s aim is to operate as systematically as possible and incorpo- rate risk management in normal business processes. The Group in- vests in quality management systems and the management of occu- pational safety and health risks. Pihlajalinna aims to limit the poten- tial adverse impacts of risks. The assessment of sustainability-related risks plays an important role in risk management. Pihlajalinna operates only in Finland. Russia’s invasion of Ukraine has indirect impacts on the Group’s operations due to the slowing eco- nomic growth, supply chain disruptions, high inflation and rising mar- ket interest rates. Pihlajalinna has also taken steps to prepare for po- tential disruptions in energy distribution. Pihlajalinna will refrain from all business activities with parties subject to economic sanctions. In all of its operations, Pihlajalinna takes into account data protection, information security and related requirements. Information security threats and jeopardised data protection can lead to significant repu- tational damage and claims for compensation, among other conse- quences. Pihlajalinna has taken steps to prepare for the elevated risk of cyber attacks related to the war in Ukraine. The COVID-19 pandemic has had a twofold impact on Pihlajalinna’s business: on the one hand, the demand for COVID-19 services has at times driven the growth of Pihlajalinna’s business but COVID-19 re- strictions have at times led to weaker demand for services. The in- crease in respiratory infections has led to a higher rate of sickness-re- lated absences among the personnel, which reduces the company’s profitability and complicates service provision. Pihlajalinna has recognised risks associated with projects related to the company’s growth, including acquisitions, digital development and information system projects. The successful implementation of these projects is a precondition for growth in accordance with the company’s strategy. Monitoring and forecasting financial covenants included in the Com- pany’s financing agreements is a significant part of the Company's risk management. The situation concerning the company’s financing agreement is discussed in more detail in the section Financing ar- rangements. The company has identified uncertainties related to the availability of personnel in the social and healthcare sector. In addition, the costs of wage harmonisation in the social and healthcare sector in relation to the creation of the wellbeing services counties remain uncertain to some degree. The development of the Finnish economy, general cost inflation, wage inflation and rising market interest rates have a negative impact on the cost level and, consequently, on Pihlajalinna’s business opera- tions, profitability and potentially the availability of additional financ- ing. Complete and partial outsourcings The reforms concerning the organisation of social, healthcare and res- cue services may lead to changes in Pihlajalinna’s outsourcing agree- ments for social and healthcare services. Processes stipulated by the legislation concerning the reform of healthcare and social services are being carried out in cooperation with the wellbeing services counties to ensure the application of the service agreements as part of the organisation and production of ser- vices in the wellbeing services counties. This may affect the term of validity of Pihlajalinna’s service agreements and the scope of the ser- vices provided. Pursuant to the legislation concerning the reform of social and healthcare services, the wellbeing services counties are re- quired to indicate the possible changes to their subcontracting agree- ments by the end of October 2023. The new con-tract terms will how- ever enter into force at the beginning of 2026 at the latest. According to the assessment of the company’s management, its fixed-term ser- vice agreements will remain in effect, as agreed, with the wellbeing services counties until the end of the term for each agreement. Determining the annual profitability of the Group’s fixed-term com- plete social and healthcare services outsourcing agreements may be- come accurate with a delay. The group may not always know the ac- tual costs of the agreements at the time of preparing the financial statements, and the agreements include variable elements of com- pensation. The cost accumulation of public specialised care involves random fluctuation. In addition, individual cases falling within the scope of the hospital districts’ pooling system for high-cost care may REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 13 influence the costs of specialised care during the financial year, and between financial periods, in Pihlajalinna’s municipal companies. The fixed-term service agreements for the Group’s complete out- sourcing arrangements are highly similar with regard to their princi- ples and basic terms. Pihlajalinna has calculated and recognised the variable compensation components and cost compensation under the agreements using the same criteria and model for all clients. De- mands for the compensation of cost increases due to changes in ser- vices corresponding to the actual costs and investment costs that serve operations after the end of the term of the contract being the client’s responsibility constitute the majority of costs and variable compensation components that are specified with a delay. The management has assessed the impact of the decision handed down on 4 April 2022 by the District Court of Central Finland on Pihla- jalinna’s other service agreements. The District Court did not deny the validity of the grounds for the variable charges in Jämsän Terveys’ service agreement, but the District Court found that the evidence presented regarding the realisation of the costs was insufficient. The ruling is not final. Pihlajalinna has recognised only part of its legally justified claims in its income statement. The parties to the agreements are bound by an obligation to negotiate and negotiation is the primary procedure. If the obligation to negotiate does not lead to payment, the receivables are sought through legal action, which may further delay the collec- tion of items presented in current receivables in the financial state- ments. Items that may, according to the management’s estimate, in- fluence the profitability of complete out-sourcing agreements with a delay: On 4 April 2022, the District Court of Central Finland handed down its ruling on the dispute concerning the service agreement between Jä- msän Terveys Oy and the City of Jämsä. The ruling is not final. As a result of adjustment items in accordance with the court's ruling, the profit attributable to the owners of Pihlajalinna Group's parent company decreased by EUR 2.8 million during the financial year. The ruling decreased revenue by EUR 2.4 million, and EBITDA was encum- bered by EUR 4.6 million. The City of Jämsä owns 49 per cent of the company and Pihlajalinna 51 per cent. Earnings per share were weak- ened by EUR 0.12 per share by the ruling. The ruling did not have an immediate material impact on cash flow. For the sake of comparabil- ity, the effects of the District Court's ruling have been processed as adjustment items. Jämsän Terveys has filed an appeal regarding the District Court’s ruling to the Court of Appeal. The operating precondi- tions for Jämsän Terveys’ service production have been secured with an efficiency improvement programme and temporary parent com- pany funding. During the financial year, Jämsän Terveys Oy has recognised as reve- nue and recorded in its receivables EUR 1.2 million, mainly COVID-19- related costs for the current year, which the client has not paid in breach of the service agreement. In addition, a difference of opinion has emerged between the company and the City during the financial year on the impact of the transfer of personnel on the annual fee un- der the service agreement. The parties are actively engaged in negoti- ations with a view to resolving outstanding issues. The above matters have been agreed with the new client, i.e. the Wellbeing Services County of Central Finland, as presented to the City of Jämsä as of 1 January 2023. The total amount of contractually and legally justified variable com- pensation from the City of Mänttä-Vilppula that Mäntänvuoren Ter- veys Oy has recognised as revenue and recorded in its receivables amounts to EUR 4.3 (4.1) million. The variable compensation recog- nised as revenue in accordance with the agreement includes an esti- mate of compensation for specialised care costs to the service pro- vider of the Pirkanmaa Hospital District’s investment costs allocated to the client. The receivables from variable compensation compo- nents are also related to cost increases caused by service changes and compensating such increases in accordance with the actual costs. A preliminary agreement has been made with the new client repre- sentatives, i.e. the Wellbeing Services County of Pirkanmaa, to trans- fer the cost liability of demanding specialised care away from the company. The total amount of contractually and legally justified variable com- pensation from the City of Parkano that Kolmostien Terveys Oy has recognised as revenue and recorded in its receivables amounts to EUR 1.3 (1.7) million. The amount has been influenced by the deci- sion of the Parkano City Council on 26 Septem-ber 2022 to allocate an additional appropriation to the budget of the basic welfare com- mittee for 2022. The variable compensation recognised as revenue in accordance with the agreement includes an estimate of compensa- tion for specialised care costs to the service provider of the Pir- kanmaa Hospital District’s investment costs allocated to the client. Other receivables from variable compensation are mainly related to COVID-19 cost compensation for the year 2022. The client has al- ready previously approved cost increases arising from changes to ser- vices for the elderly as part of the annual fee under the service agree- ment. A preliminary agreement has been made with the new client representatives, i.e. the Well-being Services County of Pirkanmaa, to transfer the cost liability of demanding specialised care away from the company. The total amount of contractually and legally justified variable com- pensation that the lead contracting partner for complete outsourcing Pihlajalinna Terveys Oy has recognised as revenue and recorded in its receivables amounts to EUR 0.6 (0.2) million. The Group's receivables include the above-mentioned items totalling EUR 7.4 (9.8) million. Pending legal processes: On 4 April 2022, the District Court of Central Finland handed down its ruling on the dispute concerning the service agreement between Jä- msän Terveys Oy and the City of Jämsä, as mentioned above in the section Items that may, according to the management’s estimate, in- fluence the profitability of complete out-sourcing agreements with a delay. Jämsän Terveys has filed an appeal regarding the District Court’s ruling to the Court of Appeal. The City of Jämsä has criticised the decision of Jämsän Terveys Oy’s Annual General Meeting 2022 concerning an increase in working cap- ital in accordance with the shareholder agreement. The case is pend- ing in the District Court of Central Finland. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 14 Pihlajalinna is involved in certain pending legal proceedings concern- ing employment relationships, but they are not expected to have a significant financial impact on the Group. Impairment testing of goodwill: At the end of the financial year, goodwill on Pihlajalinna’s statement of financial position amounted to EUR 251.0 (188.9) million. Pihla- jalinna checks annually, and whenever necessary, that the carrying amount of goodwill does not exceed the fair value. The annual im- pairment testing was conducted on the situation on 30 November 2022. Pihlajalinna observed no indications of the carrying amount of goodwill being greater than its estimated recoverable amount. The cash-generating unit’s recoverable amount exceeded the carrying amount by approximately EUR 223 million. If permanent negative changes were to occur in the development of Pihlajalinna’s profit and growth, this could lead to an impairment of goodwill. Flagging notifications The company did not receive any flagging notifications under Chapter 9, Section 5 of the Securities Markets Act during the financial year. Share-based incentive schemes At its meeting on 23 March 2022, the Board of Directors approved the terms of a share-based incentive program (LTIP 2022) for the key persons of the company. In its entirety the incentive scheme is to form a six- year program and the share rewards based on the pro- gram are not allowed to be disposed of prior to year 2025. In addi- tion, in order to participate to the program, a key person must invest into Pihlajalinna shares. Performance and quality-based share program shall comprise of four separate performance periods of one year each (calendar years 2022, 2023, 2024 and 2025). Potential share rewards shall be paid out after the performance periods in years 2023, 2024, 2025 and 2026 pro- vided that the performance and quality-based targets as set by the board are reached. The maximum number of shares (gross amount prior to deduction of applicable withholding tax) for each one year performance period is defined in the allocation per participant. Shares paid off as share rewards shall be subject to a two-year trans- fer restriction. The criteria for the performance and quality based ad- ditional share program are adjusted EBITA as well as key operative and quality indicators of Pihlajalinna Group. A total of 42 key persons are entitled to participate to the share- based incentive program. In case all the persons entitled to partici- pate do participate to the program by meeting the condition of in- vestment in full and in case the performance targets set to the pro- gram are achieved in total, the total amount of the share rewards payable under the program is a maximum of approximately 1,100,000 shares (gross amount prior to the deduction of applicable withholding tax) and the total value of the share reward pro-gram is approximately EUR 12.8 million. In case the program materializes in full, the above amount of shares equals approximately to 4.8 per cent of the total amount of the shares of the company. No performance- and quality-based share rewards materialised for the first performance period 2022 pursuant to the incentive plan, as the minimum objectives set for the programme were not achieved. Repurchase of own shares Pihlajalinna has repurchased, between 24 March and 20 April 2022, its own shares totaling 120,000 shares with an average price of EUR 12.2896 per share. Pihlajalinna conveyed, in March, a total of 8,867 own shares to the key employees in accordance with the earlier incentive program (LTIP 2019). Pihlajalinna conveyed, in April, a total of 59,900 own shares as con-sideration in a transaction to redeem non-controlling interests of its subsidiary. Pihlajalinna conveyed, in May, a total of 6,642 own shares as part of the remuneration of the Board of Directors. The number of own shares was 70,491 at the end of the review pe- riod, corresponding to approximately 0,31 per cent of the total num- ber of shares and votes. Own shares can be used for payments for the incentive program cur- rently in effect. The Board of Directors’ proposal for profit distri- bution and the Annual General Meeting 2022 The Board of Directors proposes no dividend distribution for the fi- nancial year that ended on 31 December 2022. On the balance sheet date, the number of shares outstanding was 22,594,644. Pihlajalinna Plc’s Annual General Meeting will be held on 4 April 2023 in Tampere. The Board of Directors will decide on the notice of the General Meeting and the included proposals at a later date. The annual report for 2022, including the Board of Directors’ report and the financial statements, will be published on the company’s in- vestor website at investors.pihlajalinna.fi in week 11. Calculation of the parent company's distributable funds: EUR 31 Dec 2022 Reserve for invested unrestricted equity 183,190,483.50 Retained earnings 32,547,508.75 Profit for the period -4,503,903.60 Capitalised development costs -258,323.20 Total 210,975,765.45 Pihlajalinna’s outlook for 2023 In 2023, Pihlajalinna will focus on improving its profitability and finan- cial position. ● The Group expects the consolidated revenue to increase from the previous year’s level (EUR 690.5 million in 2022). ● The Group expects the adjusted operating profit before the amorti- sation and impairment of intangible assets (EBITA) to improve from the previous year’s level (EUR 26.7 million in 2022). ● The Group has initiated a number of measures to strengthen its fi- nancial position. Change negotiations commenced in January 2023 and efficiency improvement programmes in complete outsourcing REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 15 agreements are expected to improve Pihlajalinna’s profitability. Price increases are expected to compensate the effects of inflation. The outlook for 2023 involves uncertainty related to the high inflation in the euro area, development of costs in general and the develop- ment of wages in particular. The impacts of the commencing wellbe- ing services counties and COVID-19 on the social and healthcare sec- tor also remain uncertain. Slowed economic growth, weakened con- sumer confidence and rising market interest rates may affect Pihla- jalinna’s service demand and financial result more than expected. Corporate Governance Statement Pihlajalinna publishes its Corporate Governance Statement separately on the company’s investor website at investors.pihlajalinna.fi at the same time as the Board of Directors’ report during week 11. Up-to- date information about compliance with and deviations from the Cor- porate Governance Code is maintained on the investor site at inves- tors.pihlajalinna.fi. Statement of non-financial information Pihlajalinna reports non-financial information in accordance with the Finnish Accounting Act and the EU Taxonomy Regulation. Pihla- jalinna’s annual reporting also includes information on social, eco- nomic and environmental responsibility reported in accordance with the Core level of the GRI (Global Reporting Initiative) reporting frame- work. This statement of non-financial information included in the Board of Directors’ report covers the operating principles, risks, results and in- dicators related to Pihlajalinna’s sustainability themes. Values, business and value creation Pihlajalinna is one of the leading private providers of healthcare and wellbeing services in Finland. The Group provides general practitioner and specialised care services, occupational healthcare and dental care services, and residential services, for example. Pihlajalinna’s shares are listed on Nasdaq Helsinki. Pihlajalinna’s customers include private individuals, corporations, in- surance companies and wellbeing services counties, for whom the company provides a wide range of local, remote and digital services. In the public sector, the company provides social and healthcare pro- duction models in which cooperation guarantees high-quality ser- vices. The company’s values are energy, ethics and open-mindedness. Pihla- jalinna offers its personnel meaningful work in safe working condi- tions. Each employee is important as a member of the work commu- nity and as a developer of the customer experience and operational quality. Pihlajalinna has an impact on, and generates value for, its various stakeholders ranging from societal operators to customers, the per- sonnel, shareholders and the environment. The more detailed value creation framework, including the basis of impact and the company’s impacts, is described in Pihlajalinna’s Annual Report. Pihlajalinna’s Annual Report will be published on the company’s investor website at investors.pihlajalinna.fi at the same time as the Board of Directors’ report in week 11. Material themes, key indicators and management of sustainability Pihlajalinna is committed to the UN Sustainable Development Goals and the Global Compact principles of responsible business, which guide the company’s business planning and sustainability efforts. Pihlajalinna respects internationally recognised human rights and equality. Pihlajalinna does not condone discrimination based on em- ployees’ and practitioners’ origin, nationality, religious beliefs, ethnic- ity, gender, age or any other such factor. Pihlajalinna's responsibility work is also based on the materiality defi- nition set in 2021, where management and stakeholders were con- sulted. The aim is to re-evaluate the materialities from the perspec- tive of the double materiality required by the EU's Corporate Sustain- ability Reporting Directive (CSRD) during 2023. Three sustainability themes have been identified for Pihlajalinna based on materiality: responsibility for health and wellbeing, respon- sibility for personnel, and sustainable business. The key indicators specified for the themes are access to surgical treatment within the target time, the share of preventive work in occupational healthcare, customer satisfaction, and employee satisfaction. The themes and re- sults are described in more detail in the section Sustainability themes and key results. Some of the indicators are also incorporated into the company’s long-term loan agreement signed in 2022. Pihlajalinna monitors the GRI reporting framework indicators in its Annual Re- port, which is published in week 11, simultaneously with the Board of Directors’ report on the company’s investor pages at investors.pihla- jalinna.fi. A more comprehensive overview of sustainability indicators is provided in the Annual Report. Pihlajalinna will continue to specify and promote its sustainability strategy in 2023. In addition to Global Compact reporting and the GRI Standards, Pihla- jalinna’s sustainability efforts are also assessed in accordance with the EcoVadis sustainability assessment. In 2022, Pihlajalinna achieved a bronze medal in the EcoVadis rating, which assesses companies’ sustainability from the perspective of environmental issues, labour and human rights, ethical operating practices and sustainable sourc- ing. Pihlajalinna’s sustainability actions have a clear administrative struc- ture, and they are carried out in accordance with guidelines and poli- cies drawn up on the basis of international principles. Pihlajalinna’s sustainability efforts are led by the Group’s communications and sus- tainability team and a corporate responsibility working group led by the Vice President for Communications and Sustainability, which con- sists of representatives of the Group’s businesses as well as medical experts and specialists in Group functions such as finance, properties and law. The working group prepares and ensures measures in line with the company’s sustainability targets and reports to the Manage- ment Team on the progress of sustainability efforts four times per year. The Management Team approves and monitors the sustain-abil- ity strategy and related actions, and ensures that the necessary re- sources are available. The highest decision-making body concerning the company’s sustainability is the Board of Directors, which also REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 16 monitors progress on the chosen themes at the annual level. The Board of Directors also decides on guidelines and policies. Pihlajalinna respects internationally recognised human rights and equality. Pihlajalinna does not condone discrimination based on em- ployees’ and practitioners’ origin, nationality, religious beliefs, ethnic- ity, gender, age or any other such factor. Pihlajalinna’s Code of Con- duct describes the way the company operates, based on the princi- ples of good governance and law, transparency, fairness and confi- dentiality. The Code of Conduct also includes the company’s commit- ment to the prevention of bribery and corruption, compliance with competition law and cooperation with stakeholders. Training on the Code of Conduct is part of the induction training programme, and all Pihlajalinna professionals are required to complete the training. Pihlajalinna has a confidential whistleblowing channel that can be used for reporting activities that violate the Code of Conduct. Pihla- jalinna’s Board of Directors monitors compliance with the Code of Conduct. During the 2022 reporting period, a total of four notifica- tions were received via the whistleblowing channel. Each whistle- blower report was investigated and none of them led to any further action. In addition, no activities contrary to legislation or the Code of Conduct or misconduct were identified on the basis of the reports. Pihlajalinna manages sustainability in a clear manner to ensure that the company operates in a responsible and ethical manner and pro- motes and enables the achievement of the set targets. Sustainability risks and opportunities The most significant risks associated with the material sustainability themes are assessed and efforts are made to limit their potential im- pacts as part of the company’s general risk management process. The most material identified sustainability risks are related to clinical quality and safety, the availability and retention of highly competent professionals, information security and values, ethics and consistent operating practices. Limiting risks related to clinical quality, patient safety, values, ethics and consistent operating practices is among Pihlajalinna’s most signif- icant risk management measures. Pihlajalinna also has an ISO 9001:2105 quality management system certificate. Pro-moting the continuous training of the company’s professionals as well as promot- ing consistent operating practices by means of Pihlajalinna’s quality and patient safety policy and Code of Conduct play a key role. This en- sures consistent quality and impactful services for the company’s cus- tomers. The development of operations enables the development of new innovations for work with patients. Pihlajalinna participates in research to promote clinical quality and impact. Pihlajalinna has identified uncertainties related to the availability of personnel in the field of social and healthcare services. By promoting the employee experience through good leadership, career develop- ment and equality, the company aims to attract and retain healthcare professionals – both experienced professionals and those who are in the early stages of their career. Pihlajalinna also participates in pro- jects that promote international recruitment. In all of its operations, Pihlajalinna takes into account data protection, information security and the related requirements. The company has taken preparations for the risk of cyber attacks, which has been ele- vated by Russia’s invasion of Ukraine. The aim is to ensure the secure processing of patient and personal data as well as the protection of the privacy of patients, customers and the company’s personnel. A further goal is the prevention of disruptions in the functioning of criti- cal information systems that could jeopardise service availability. Data protection and information security are an important part of Pihlajalinna’s ISO 9001 certified quality management system. Due to the nature of its operations, the company’s carbon intensity is low. Pihlajalinna has not identified significant environmental or cli- mate related risks that directly impact its operations. However, the company is aware of long-term and medium-term environmental and climate-related risks related to, for example, the availability of financ- ing and operating costs. The company is preparing to introduce an ISO 14001 environmental management system in part of its opera- tions during 2023 and will continue to assess climate risks in 2023. Sustainability themes and key results Pihlajalinna’s key sustainability themes are responsibility for health and wellbeing, responsibility for personnel, and sustainable business. Responsibility for health and wellbeing Clinical quality and impact are among the company’s highest priori- ties. The professional competence of the personnel is the foundation of patient safety. The qualifications of employees are verified during recruitment and they receive induction training in accordance with the applicable induction training programme. We actively develop the professional competence of our personnel. Pihlajalinna’s quality management is based on comprehensive self- monitoring. The self-monitoring plan was updated in 2022. Self-moni- toring makes it possible to quickly identify risks related to quality or safety. The business locations have a reporting system for the per- sonnel to report any deviations. Customers report any problems they observe either directly to the personnel or through Pihlajalinna’s feedback systems. Pihlajalinna is a significant operator in specialised care. The objective of surgical operations is to implement a quick and high-quality chain of care, enabling quick recovery and rehabilitation for patients. Ac- cess to surgical treatment within the target time has been highlighted as one of the company’s key sustainability indicators. With regard to access to surgical procedures for customers who are unable to work, Pihlajalinna aims to offer the first available surgical appointment within five weekdays. In 2022, the target for this was set at 66 per cent, and the target was achieved. In occupational health services, the prevention of illness is in every- one’s interest and helps reduce costs. The emphasis on preventive activities in occupational healthcare is monitored on a professional group-specific basis. Pihlajalinna’s minimum target for the share of preventive work in the invoicing of occupational health physicians was 60 per cent in 2022. In 2022, preventive work accounted for 61.1 per cent of invoicing. Pihlajalinna aims for an excellent customer experience in all of its ser- vices. The systematic collection and processing of feedback enables the company to develop services, processes and operating models ac- cording to the customers’ wishes. Pihlajalinna uses the Net Promoter Score (NPS) to measure the customer experience. Pihlajalinna reports NPS in two parts. The NPS for Pihlajalinna’s appointments was 77.1 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 17 (76.5) and the NPS for complete and partial outsourcing arrange- ments was 72.6 (70.8). The NPS target for 2025 is 80. The perfor- mance indica-tors will be developed further in 2023 to correspond to the Group’s current structure. Customer equality can be increased by improving the availability of services through the provision of remote services, even in areas where in-person services or the expert in question may not be availa- ble. In 2022, some 37 (36) per cent of Pihlajalinna’s appointments (excluding complete outsourcing arrangements and COVID-19 test- ing) were conducted remotely. Responsibility for personnel Pihlajalinna systematically promotes its responsibility for personnel. The company has a comprehensive equality and non-discrimination policy and a general HR policy. Pihlajalinna wants to be the first choice among professionals in its industry. The number of personnel at Pihlajalinna grew substantially in 2022 due to a number of M&A transactions. The increase in Pihlajalinna’s supply also increased the number of practitioners. At the end of the year, the company had 7,016 (6,297) employees and 1,812 (1,070) practitioners. Key personnel indicators are reported in more detail as part of the Annual Report. Employees are a key asset for the company: their expertise and com- petence are the basic conditions for an excellent customer experi- ence, the fulfilment of the strict quality requirements in the social and healthcare sector and sustainability in business. Investments in the development and wellbeing of the personnel also help to ensure Pihlajalinna’s competitiveness in a rapidly changing market. The de- velopment of work ability is one of the company’s key themes for the current strategy period. In 2022, Pihlajalinna launched a unique coop- eration project with pension insurance companies. One of the main objectives of the project is to reduce sickness-related absences. Pihla- jalinna’s sickness-related absence rate in 2022 was 9.8 (7.8) per cent. The company actively listens to the personnel to obtain information on the state of the work community. Employee satisfaction is meas- ured by the eNPS indicator, which is also one of Pihlajalinna’s key sus- tainability indicators. Pihlajalinna’s eNPS for 2022 was -1.5 (+1.0), while the target set for 2022 was +5. The Group’s eNPS excluding complete and partial outsourcing arrangements in 2022 was +11 (+15) and the eNPS of the Group’s complete and partial outsourcing arrangements in 2022 was -17 (-14). All Pihlajalinna employees are within the scope of annual develop- ment discussions. Pihlajalinna Academy is an online learning environ- ment for the company’s personnel that offers weekly updated con- tent to support competence development. The total amount of train- ing for the personnel came to 71,085 hours in 2022. At Pihlajalinna, the management of occupational safety is aimed at maintaining a healthy and safe working environment and the effec- tive prevention of accidents through training and the improvement of operating practices, for example. The most common causes of acci- dents were falling, slipping and unexpected behaviour by a customer. The number of serious accidents that resulted in an absence of more than 30 days remained low in 2022: only 5 (5) serious accidents were reported in the Group as a whole during the year. The accident fre- quency was 34.4, below the industry average of 35 and representing a significant improvement when compared to the previous year (49.0). The accident frequency indicates the number of accidents leading to an absence of at least one day per million hours worked. Sustainable business Pihlajalinna was founded more than 20 years ago to solve regional la- bour availability challenges in healthcare. The company continues to operate under the joint venture model it has developed, in which Pihlajalinna establishes a joint venture with the municipality or joint municipal authority – or, effective from the beginning of 2023, the wellbeing services county – in question, with Pihlajalinna owning a majority stake. Effective from the beginning of 2023, all agreements have been transferred to the newly established wellbeing services counties. Pihlajalinna’s operations generate economic added value in Finland, especially in the regions of Pirkanmaa, South Ostro-bothnia and Cen- tral Finland. The most significant direct economic impacts arise from procurement, the remuneration of personnel and practitioners, and the payment of taxes and tax-like charges. As a rule, all of the goods and services purchased by Pihlajalinna are purchased from Finnish companies. Pihlajalinna’s parent company and all of its subsidiaries are registered in Finland. Pihlajalinna is a public limited company and 98.6 (98.6) per cent of the company’s shares are owned by Finnish shareholders. Pihlajalinna complies with Finnish legislation in the collection, remit- tance and payment of taxes and tax-like charges. The Group pays all of its taxes to Finland. In 2022, Pihlajalinna’s operations generated a total of EUR 155.7 (131.9) million in payments to society. In addition, Pihlajalinna paid a total of EUR 112.5 (73.0) million in fees to practi- tioners, for which the practitioners themselves pay the taxes in- volved. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 18 Tax footprint EUR million 2022 2021 Direct tax payable for the period Income tax (business income tax) 2.0 5.3 Employer’s pension contributions 42.0 35.3 Social security contributions 3.3 3.2 Employer’s unemployment insurance cont- ributions 4.3 3.5 Contribution to accident insurance and group life insurance 1.6 1.6 Employer contributions, total 51.2 43.7 Property taxes 0.2 0.1 Transfer taxes 0.9 0.4 Direct tax payable for the period, total 54.2 49.5 Value added tax of acquisitions payable by the company Value added taxes, estimate 20.1 14.3 Tax for the period Withholding taxes 57.8 48.0 Employee pension contributions 18.4 15.8 Employee unemployment insurance contri- butions 3.6 2.9 Payroll tax, total 79.8 66.7 Net value-added tax 1.5 1.4 Total tax for the period 81.3 68.1 Tax footprint 155.7 131.9 Pihlajalinna’s procurement principles are documented in a Supplier Code of Conduct, which service providers, suppliers and partners are required to comply with. The document was incorporated into all new cooperation agreements and significant existing agreements in late 2022. For Pihlajalinna, the management of data protection and information security is of vital importance, and its purpose is to ensure the secure processing of patient and personal data as well as the protection of the privacy of patients, customers and the company’s personnel. A further goal of information security management is the prevention of disruptions in the functioning of critical information systems that could jeopardise service functionality or availability. Pihlajalinna’s tar- get for data protection is zero successful attempts to gain unauthor- ised access. This target was achieved in 2022. A further target is for 100 per cent of information security updates to be installed within the first week of their release. The result in 2022 was approximately 89 per cent. More information on information security is provided in the Annual Report. In 2022, Pihlajalinna began developing measures to increase the well- being of the environment. The company’s environmental policy sets out the approach to environmental issues. The environmental im- pacts of Pihlajalinna’s operations arise mainly from energy consump- tion, carbon dioxide emissions and waste. Due to the nature of its op- erations, the company’s carbon intensity is low. Pihlajalinna began assessing and calculating its carbon footprint in 2022. An emission calculation for the greenhouse gas emissions of Pihlajalinna’s operations and value chain was carried out in accord- ance with the internationally recognised GHG Protocol (Scope 1, 2 and 3). The emission accounting model can be used to report the sig- nificant direct and indirect greenhouse gas emissions of the value chain. More details on the emission calculation are included in the Annual Report. In 2023, Pihlajalinna will continue to improve the cal- culations and draft a climate roadmap that will support the setting of climate targets throughout the Group. Pihlajalinna is also preparing for the partial deployment of an ISO 14001 environmental manage- ment system in the Group in 2023. As the company’s first climate action, Pihlajalinna switched to zero- emission electricity at the end of 2022. The purchasing of zero-emis- sion electricity is an important part of managing Pihlajalinna’s climate impacts. EU taxonomy reporting The EU taxonomy is a classification system for environmentally sus- tainable economic activities. At this stage, the scope of Pihlajalinna’s operations covered by the cli- mate regulations is limited to the economic activities that have the greatest need and potential to substantially contribute to climate change mitigation and adaptation. The company’s interpretation is that its business activities are not within the scope of the classifica- tion system, as the production of social and healthcare services is not among the industries with the highest emissions. Pihlajalinna has assessed the taxonomy eligibility of its economic ac- tivities and concluded that the taxonomy-eligible share of turnover (totalling EUR 690.5 million), capital expenditure (totalling EUR 234.5 million) and operating expenditure (totalling EUR 22.15 million) is 0% for all three. Accordingly, the non-eligible share of turnover, capital expenditure and operating expenditure is 100%. Information on tax- onomy-aligned activities is presented in the tables below. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 19 Proportion of turnover from products or services associated with Taxonomy-aligned economic activities - disclosure covering year 2022 Substantial contribution criteria DNSH criteria (‘Does Not SignJOSicantly Harm’) Economic activities Code(s) Absolute turnover Proportion of turnover Climate change mitigation Climate change adaptation Water and marine resources Circular economy Pollution Biodiversity and ecosystems Climate change mitigation Climate change adaptation Water and marine resources Circular economy Pollution Biodiversity and ecosystems Minimum safeguards Taxonomy- aligned pro- portion of turnover 2022 Taxonomy- aligned pro- portion of turnover 2021 Category (enabling activity) Category (transitional activity) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) MEUR % % % % % % % Y/N Y/N Y/N Y/N Y/N Y/N Y/N % % E T A. TAXONOMY-ELIGIBLE ACTIVITIES % A.1. Environmentally sustainable activities (Taxonomy -aligned) Activity 1 [1] N/A N/A N/A N/A N/A N/A Activity 2 N/A N/A N/A N/A N/A N/A Turnover of environmentally sustainable activities (Taxonomy- aligned) (A.1) A.2 Taxonomy-Eligible but not environmentally sustainable activi- ties (not Taxonomy -aligned activities) Activity 1 Activity 3 Turnover of Taxonomy -eligible but not environmentally sustaina- ble activities (not Taxonomy -aligned activities) (A.2) Total (A.1 + A.2) 0 0% B. TAXONOMY-NON-ELIGIBLE ACTIVITIES Turnover of Taxonomy -non-eligible activities (B) 690.5 100% Total (A + B) 690.5 100% REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 20 Proportion of CapEx from products or services associated with Taxonomy-aligned economic activities - disclosure covering year 2022 Substantial contribution criteria DNSH criteria (‘Does Not SignJOSicantly Harm’) Economic activities (1) Code(s) Absolute CapEx Proportion of CapEx Climate change mitigation Climate change adaptation Water and marine resources Circular economy Pollution Biodiversity and ecos ystems Climate change mitigation Climate change adaptation Water and marine resources Circular economy Pollution Biodiversity and ecosystems Minimum safeguards Taxonomy- aligned pro- portion of CapEx 2022 Taxonomy- aligned pro- portion of CapEx 2021 Category (enabling activity) Category (transitional activity) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) MEUR % % % % % % % Y/N Y/N Y/N Y/N Y/N Y/N Y/N % % E T A. TAXONOMY-ELIGIBLE ACTIVITIES A.1. Environmentally sustainable activities (Taxonomy -aligned) Activity 1 [1] N/A N/A N/A N/A N/A N/A N/A Activity 2 N/A N/A N/A N/A N/A N/A N/A CapEx of environmentally sustainable activities (Taxonomy- aligned) (A.1) A.2 Taxonomy-Eligible but not environmentally sustainable activi- ties (not Taxonomy -aligned activities) Activity 1 Activity 3 CapEx of Taxonomy -eligible but not environmentally sustainable activities (not Taxonomy -aligned activities) (A.2) Total (A.1 + A.2) 0 0% B. TAXONOMY-NON-ELIGIBLE ACTIVITIES CapEx of Taxonomy -non-eligible activities (B) 234.5 100% Total (A + B) 234.5 100% REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 21 Proportion of OpEx from products or services associated with Taxonomy-aligned economic activities - disclosure covering year 2022 Substantial contribution criteria DNSH criteria (‘Does Not SignJOSicantly Harm’) Economic activities (1) Code(s) Absolute OpEx Proportion of OpEx Climate change mitigation Climate change adaptation Water and marine resources Circular economy Pollution Biodiversity and ecosystems Cli mate change mitigation Climate change adaptation Water and marine resources Circular economy Pollution Biodiversity and ecosystems Minimum safeguards Taxonomy- aligned pro- portion of OpEx 2022 Taxonomy- aligned pro- portion of OpEx 2021 Category (enabling activity) Category (transitional activity) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) MEUR % % % % % % % Y/N Y/N Y/N Y/N Y/N Y/N Y/N % % E T A. TAXONOMY-ELIGIBLE ACTIVITIES A.1. Environmentally sustainable activities (Taxonomy -aligned) Activity 1 [1] N/A N/A N/A N/A N/A N/A N/A Activity 2 N/A N/A N/A N/A N/A N/A N/A OpEx of environmentally sustainable activities (Taxonomy -aligned) (A.1) A.2 Taxonomy-Eligible but not environmentally sustainable activi- ties (not Taxonomy -aligned activities) Activity 1 Activity 3 OpEx of Taxonomy -eligible but not environmentally sustainable ac- tivities (not Taxonomy -aligned activities) (A.2) Total (A.1 + A.2) 0 0% B. TAXONOMY-NON-ELIGIBLE ACTIVITIES OpEx of Taxonomy -non-eligible activities (B) 22.15 100% Total (A + B) 22.15 100% REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 22 Events after the financial period On 10 January 2023, the Group announced it would commence change negotiations. The change negotiations are still under way and the aim is to complete them within the target time of six weeks. The change negotiations concern the network of private clinics, regional management and the Group’s general management. Approximately 650 persons are within the scope of the functions in question. Ac- cording to the company’s preliminary estimate, the negotiations may lead to a reduction of 40–60 positions in Pihlajalinna, and the admin- istrative duties of 30–40 employees may be discontinued or reduced. The allocation of the planned measures and their impacts in the per- sonnel will be discussed in more detail during the negotiations. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 23 Key financial figures Scope of operations 2022 2021 2020 2019 2018 Revenue, EUR million 690.5 577.8 508.7 518.6 487.8 Change, % 19.5 13.6 -1.9 6.3 15.0 Organic revenue growth, EUR million 11.3 58.1 -11.3 13.4 -2.0 Change, % 2.0 11.4 -2.2 2.8 -0.5 Gross investments, EUR million 234.5 44.8 25.4 44.1 160.0 % of revenue 34.0 7.8 5.0 8.5 32.8 Capitalised development costs, EUR million 0.0 0.0 0.4 0.5 1.3 % of revenue 0.0 0.0 0.1 0.1 0.3 Employee benefit expenses, EUR million 296.6 255.2 214.2 222.0 208.4 Personnel at the end of the period (NOE) 7,016 6,297 5,550 5,815 5,850 Average number of personnel (FTE) 5,167 4,746 4,308 4,649 4,868 Profitability 2022 2021 2020 2019 2018 EBITDA, EUR million 54.4 62.6 52.2 47.8 44.8 EBITDA, % 7.9 10.8 10.3 9.2 9.2 Adjusted EBITDA, EUR million 64.2 65.3 54.8 55.7 45.9 Adjusted EBITDA, % 9.3 11.3 10.8 10.7 9.4 Operating profit (EBIT), EUR million 8.9 27.9 18.1 10.2 13.2 Operating profit, % 1.3 4.8 3.6 2.0 2.7 Adjusted operating profit (EBIT), EUR million 18.6 30.3 21.1 21.4 14.4 Adjusted operating profit, % 2.7 5.3 4.2 4.1 3.0 Adjusted operating profit before the amortisation and im- pairment of intangible assets (EBITA), EUR million 26.7 37.3 27.4 28.9 21.6 Adjusted EBITA, % 3.9 6.5 5.4 5.6 4.4 Net financial expenses, EUR million -7.4 -3.7 -4.4 -3.9 -2.8 % of revenue -1.1 -0.6 -0.9 -0.8 -0.6 Profit before tax, EUR million 1.5 24.2 13.8 6.3 10.0 % of revenue 0.2 4.2 2.7 1.2 2.0 Income tax, EUR million 6.1 -5.1 -4.8 -1.8 -2.7 Profit for the period 7.7 19.1 9.0 4.5 7.2 Cash flow after investments, EUR million -18.6 24.9 42.8 17.4 -18.8 Return on equity (ROE), % 6.2 16.1 8.1 3.8 5.7 Return on capital employed (ROCE), % 2.3 8.8 5.7 3.1 5.9 Funding and financial position Interest-bearing net financial debt, EUR million 385.7 194.7 194.8 192.7 178.0 % of revenue 55.9 33.7 38.3 37.2 36.5 Equity ratio, % 18.6 26.9 26.1 24.3 29.9 Gearing, % 313.8 158.8 170.6 181.7 136.6 Net debt/adjusted EBITDA 6.0 3.0 3.6 3.5 3.9 Share related information 2022 2021 2020 2019 2018 Earnings per share (EPS) 0.42 0.89 0.38 0.16 0.16 Equity per share, EUR 5.50 5.27 4.82 4.44 5.36 Dividend per share, EUR (the Board of Directors’ proposal) 0.30 0.20 0.10 Dividend per share, % (the Board of Di- rectors’ proposal) 33.72 52.00 63.96 Effective dividend yield, % (the Board of Directors’ proposal) 0.00 2.37 2.13 1.20 1.16 Number of shares at year-end 22 549 644 22,594,235 22,617,841 22,620,135 22,620,135 Average number of shares 22 560 271 22,589,383 22,586,212 22,620,135 22,224,236 Market capitalisation, EUR million 192.1 285.6 212.2 345.6 195.0 Dividends paid, EUR million (the Board of Directors’ proposal) 6.8 4.5 2.3 P/E ratio 0.05 0.07 0.04 0.01 0.02 Highest quotation, EUR 13.18 12.98 15.66 15.88 15.28 Lowest quotation, EUR 8.48 9.26 8.72 8.70 8.56 Average quotation, EUR 11.06 11.18 12.09 12.77 12.18 Closing price at year-end, EUR 8.52 12.64 9.38 15.28 8.62 Trading volume of shares, 1,000 shares 3 770 6,929 6,620 4,062 6,182 Trading volume of shares, % 16.7 30.7 29.3 18.0 27.8 * Alternative performance measure REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 24 Quarterly information EUR million Q4/22 Q3/22 Q2/22 Q1/22 Q4/21 Q3/21 Q2/21 Q1/21 INCOME STATEMENT Revenue 188.4 165.2 173.7 163.1 154.7 140.6 142.5 139.9 Other operating income 0.9 0.4 1.8 1.7 1.6 0.7 0.2 1.1 Materials and services -74.8 -61.8 -66.5 -64.2 -56.3 -49.3 -50.7 -53.2 Employee benefit expenses -80.4 -68.4 -74.6 -73.2 -69.3 -60.5 -64.1 -61.2 Other operating expenses -22.7 -17.4 -18.9 -18.2 -16.2 -13.3 -12.9 -11.7 EBITDA 11.5 18.1 15.6 9.3 14.5 18.2 15.0 14.9 EBITDA, % 6.1 10.9 9.0 5.7 9.4 12.9 10.5 10.6 Adjusted EBITDA 12.0 18.9 16.9 16.5 14.9 19.3 15.9 15.2 Adjusted EBITDA, % 6.4 11.4 9.7 10.1 9.6 13.8 11.1 10.9 IFRS3 expenses -0.2 -0.1 -0.2 -0.8 -0.2 -0.5 -0.7 0.0 Depreciation and amortisation -12.0 -11.5 -11.5 -10.5 -9.0 -8.8 -8.5 -8.5 Operating profit (EBIT) -0.6 6.6 4.1 -1.2 5.6 9.4 6.5 6.4 Operating profit, % -0.3 4.0 2.4 -0.7 3.6 6.7 4.6 4.6 Adjusted operating profit (EBIT) -0.2 7.3 5.0 5.2 5.8 10.0 6.3 6.6 Adjusted operating profit (EBIT), % -0.1 4.4 2.9 3.2 3.7 7.1 4.4 4.7 Adjusted operating profit before the amortisation and impairment of in- tangible assets (EBITA) 2.2 9.4 7.3 7.8 7.8 12.3 8.9 8.3 Adjusted EBITA, % 1.2 5.7 4.2 4.8 5.1 8.7 6.3 5.9 Financial income 0.4 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Financial expenses -2.7 -2.1 -1.7 -1.6 -1.1 -0.9 -1.0 -1.0 Profit before taxes (EBT) -2.8 4.5 2.5 -2.7 4.6 8.5 5.6 5.5 Income tax 1.7 -0.5 -0.3 5.2 -1.2 -1.7 -1.1 -1.1 Profit for the period -1.1 4.0 2.1 2.6 3.3 6.8 4.5 4.4 Share of the result for the period attributable to owners of the parent company -0.7 3.3 1.7 5.3 4.3 7.0 4.3 4.5 Share of the result for the period attributable to non-controlling interests -0.4 0.8 0.4 -2.7 -0.9 -0.1 0.2 -0.1 EPS 0.0 0.5 0.1 -0.7 0.2 0.7 0.2 -0.2 Average number of personnel (FTE) 5,167 5,092 5,061 4,819 4,746 4,731 4,665 4,444 Change in personnel during the quarter 75 31 243 73 15 66 221 136 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 25 Calculation of key financial figures and alternative performance measures Key figures Earnings per share (EPS) Profit for the financial period attributable to owners of the parent company Average number of shares during the financial year Alternative performance measures Equity per share Equity attributable to owners of the parent company Number of shares at the end of the financial period Dividend per share Dividend distribution for the financial year (or proposal) Number of shares at the end of the financial period Dividend/result, % Dividend per share x 100 Earnings per share (EPS) Effective dividend yield, % Dividend per share x 100 Closing price for the financial year P/E ratio Closing price for the financial year Earnings per share (EPS) Share turnover, % Number of shares traded during the period x 100 Average number of shares Return on equity (ROE), % Profit for the period (rolling 12 months) x 100 Equity (average) Return on capital employed, % (ROCE) Profit before taxes (rolling 12 months) + financial expenses (rolling 12 months) x 100 Total statement of financial position – non-interest-bearing liabili- ties (average) Equity ratio, % Equity x 100 Total statement of financial position – prepayments received Gearing, % Interest-bearing net debt – cash and cash equivalents x 100 Equity EBITDA Operating profit + depreciation, amortisation and impairment EBITDA, % Operating profit + depreciation, amortisation and impairment x 100 Revenue Adjusted EBITDA¹⁾ Operating profit + depreciation, amortisation and impairment + adjustment items Adjusted EBITDA, % ¹⁾ Operating profit + depreciation, amortisation and impairment + adjustment items x 100 Revenue Adjusted operating profit before the amortisa- tion and impairment of intangible assets (EBITA)¹⁾ Operating profit + adjustment items + amortisation and impairment of intangible assets Adjusted EBITA, %¹⁾ Adjusted operating profit before the amortisation and impair- ment of intangible assets (EBITA) x 100 Revenue Net debt/Adjusted EBITDA¹⁾, Interest-bearing net debt - cash and cash equivalents rolling 12 months Adjusted EBITDA (rolling 12 months) Cash flow after investments Net cash flow from operating activities + net cash flow from in- vesting activities Adjusted operating profit (EBIT) ¹⁾ Operating profit + adjustment items Adjusted operating profit, % ¹⁾ Adjusted operating profit (EBIT) x 100 Revenue Profit before taxes Profit for the financial year + income tax Gross investments Increase in tangible and intangible assets and in right of-use as- sets Organic revenue growth, % Revenue for the period - revenue from M&A transactions for the period - revenue for the previous period x 100 Revenue for the previous period ¹⁾ Significant transactions that are not part of the normal course of business, are related to business acquisition costs (IFRS 3), are infrequently occurring events or valuation items that do not affect cash flow are treated as adjustment items affecting comparability between review periods. According to Pihlajalinna’s definition, such items include, for example, restructuring measures, impairment of assets and the remeasurement of previous assets held by subsidiaries, the costs of closing down businesses and business locations, gains and losses on the sale of businesses, costs arising from operational restructuring and the integration of acquired businesses, costs related to the termination of employment relationships, as well as fines and corresponding compensation payments. Pihlajalinna presents costs concerning cloud computing arrangements, and reversals of amortisation, as adjustment items. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 26 Reconciliations with alternative key figures and ratios Pihlajalinna publishes a wide range of alternative performance measures, i.e. key figures that are not based on financial reporting standards, because they are considered to be significant for investors, the manage- ment and the Board of Directors in assessing the group’s financial position and profitability. The alternative performance measures should not be considered to be replacements for the key figures defined in IFRS standards. The table below presents the reconciliation calculations for the alternative performance measures and the justifications for their presentation. Reading notes: /divide by the next number/numbers - deduct the next number/numbers + add the next number/numbers EUR million 2022 2021 Return on equity (ROE), % Profit for period (rolling 12 months)/ 7.7 19.1 Equity at beginning of period 122.6 114.2 Equity at end of period 122.9 122.6 Equity (average) x 100 122.7 118.4 Return on equity (ROE), % 6.2 16.1 Return on equity is one of the most important indicators of a company’s profitability used by shareholders and investors. The indicator illustrates the company’s ability to look after the capital invested by sharehol- ders in the company. The figure indicates how much return was accumulated on equity during the financial year. EUR million 2022 2021 Return on capital employed (ROCE), % Profit before taxes (rolling 12 months) + 1.5 24.2 Financial expenses (rolling 12 months) 8.1 4.0 / 9.6 28.2 Total statement of financial position at beginning of period - 457.1 441.3 non-interest-bearing liabilities at beginning of period 135.5 119.0 321.6 322.3 Total statement of financial position at end of period - 661.6 457.1 Non-interest-bearing liabilities at end of period 138.9 135.5 522.8 321.6 Average x 100 422.2 321.9 Return on capital employed (ROCE), % 2.3 8.8 Return on capital employed is one of the most important indicators produced by financial statements ana- lysis. It measures the company’s relative profitability, or the return on capital invested in the company that requires interest or other returns. EUR million 2022 2021 Equity ratio, % Equity/ 122.9 122.6 Total statement of financial position - 661.6 457.1 Advances received x 100 0.0 0.9 Equity ratio, % 18.6 26.9 The equity ratio measures the company’s solvency, the capacity to tolerate losses and the ability to ma- nage commitments in the long term. The indicator shows the percentage of the company’s assets that are financed by equity. EUR million 2022 2021 Gearing, % Interest-bearing financial liabilities – 398.8 199.0 Cash and cash equivalents/ 13.1 4.3 Equity x 100 122.9 122.6 Gearing, % 313.8 158.8 Gearing illustrates the company’s indebtedness. The figure reveals the ratio between the equity invested in the company by shareholders and the interest-bearing debt borrowed from lenders. EUR million 2022 2021 Net debt/adjusted EBITDA, rolling 12 months Interest-bearing financial liabilities - 398.8 199.0 Cash and cash equivalents 13.1 4.3 Net debt/ 385.7 194.7 Adjusted EBITDA (rolling 12 months) 64.2 65.3 Net debt/adjusted EBITDA, rolling 12 months 6.0 3.0 This figure illustrates how quickly, at the current profit rate, the company would have paid off its debts if the EBITDA were to be used in full to repay the debts, if the company does not, for example, invest or dis- tribute any dividend. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 27 EUR million 2022 2021 EBITDA and Adjusted EBITDA Profit for period 7.7 19.1 Income tax 6.1 -5.1 Financial expenses -8.1 -4.0 Financial income 0.7 0.2 Depreciation, amortisation and impairment -45.5 -34.7 EBITDA 54.4 62.6 IFRS 3 costs – 1.3 1.4 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements 0.3 0.6 Other EBITDA adjustments 8.2 0.7 Total EBITDA adjustments 9.8 2.7 Adjusted EBITDA 64.2 65.3 EBITDA indicates how much is left of the company’s revenue after deducting operating expenses. Assess- ments of whether EBITDA is sufficiently high should take into account the company’s financial expenses, depreciation requirements and intended profit distribution. Adjusted EBITDA provides significant additi- onal information on profitability by eliminating items that do not necessarily reflect the profitability of the company’s operative business. Adjusted EBITDA improves comparability between periods and is frequently used by analysts, investors and other parties. The Group Management Team and operative management monitor and forecast adjusted EBITDA on a monthly basis. EUR million 2022 2021 EBITDA, % EBITDA/ 54.4 62.6 Revenue x 100 690.5 577.8 EBITDA, % 7.9 10.8 EUR million 2022 2021 Adjusted EBITDA, % Adjusted EBITDA/ 64.2 65.3 Revenue x 100 690.5 577.8 Adjusted EBITDA, % 9.3 11.3 EUR million 2022 2021 Operating profit (EBIT) and Adjusted operating profit (EBIT) Profit for the period 7.7 19.1 Income tax 6.1 -5.1 Financial expenses -8.1 -4.0 Financial income 0.7 0.2 Operating profit (EBIT) 8.9 27.9 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements (reversal of amortisation ) - -0.4 -0.3 Other adjustments to amortisation and impairment 0.3 0.0 Total adjustments to depreciation, amortisation and impairment 0.4 0.3 Total EBITDA adjustments 9.8 2.7 Total operating profit (EBIT) adjustments 9.7 2.4 Adjusted operating profit (EBIT) 18.6 30.3 PPA amortisation 2.7 3.0 Amortisation and impairment of other intangible assets 5.4 4.0 Entries related to the IFRIC Agenda Decision concerning cloud computing arrangements (reversal of amortisation) 0.4 0.3 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) 26.7 37.3 Operating profit indicates how much is left of the proceeds of actual business operations before financial items and taxes. With operating profit, the company must cover, among other things, financial expenses, taxes and the distribution of dividends. Adjusted operating profit provides significant additional informa- tion on profitability by eliminating items that do not necessarily reflect the profitability of the company’s operative business. Adjusted operating profit improves comparability between periods and is frequently used by analysts, investors and other parties. The Group Management Team and operative management monitor and forecast adjusted operating profit (EBIT) and adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) on a monthly basis. EUR million 2022 2021 Operating profit (EBIT), % Operating profit/ 8.9 27.9 Revenue x 100 690.5 577.8 Operating profit (EBIT), % 1.3 4.8 REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 28 EUR million 2022 2021 Adjusted operating profit (EBIT), % Adjusted operating profit/ 30.3 30.3 Revenue x 100 690.5 577.8 Adjusted operating profit (EBIT), % 2.7 5.3 EUR million 2022 2021 Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA), % Adjusted operating profit before the amortisation and impairment of intangible assets (EBITA) / 26.7 37.3 Revenue x 100 690.5 577.8 3.9 6.5 EUR million 2022 2021 Cash flow after investments Net cash flow from operating activities 64.9 56.9 Net cash flow from investing activities -83.4 -32.1 Cash flow after investments -18.6 24.9 Cash flow after investments (free cash flow) indicates how much cash is left for the company after deduc- ting the cash tied up in operative business and investments. It indicates how much the company has left for its shareholders and creditors. Free cash flow indicates how sustainable the foundation of the com- pany’s profitability is, and it is used as the basis of the company’s valuation. EUR million 2022 2021 Profit before taxes Profit for period 7.7 19.1 Income tax 6.1 -5.1 Profit before taxes 1.5 24.2 EUR million 2022 2021 Gross investments Property, plant and equipment at end of period 58.7 45.0 Right-of-use assets at end of period 197.7 95.6 Other intangible assets at end of period 22.8 14.9 Goodwill at end of period 251.0 188.9 Depreciation, amortisation and impairment for period are added 45.5 34.7 - Property, plant and equipment at beginning of period 45.0 44.0 Right-of-use assets at beginning of the period 95.6 102.8 Other intangible assets at beginning of period 14.9 15.3 Goodwill at beginning of period 188.9 173.6 Proceeds from the sale of property, plant and equipment during period -3.0 -1.5 Gross investments 234.5 44.8 Gross investments refers to the acquisition of long-term factors of production, including M&A transactions. Divestments and proceeds from the sale of property, plant and equipment are not deducted from invest- ments. Investments are also presented on a cash flow basis in the cash flow statement. EUR million 2022 2021 Organic revenue growth, % Revenue for period - 690.5 577.8 Revenue from M&A transactions during period 77.8 11.0 Revenue for previous period 577.8 508.7 Organic revenue growth / 34.9 58.1 Revenue for previous period x 100 577.8 508.7 Organic revenue growth, % 6.0 11.4 Revenue growth due to M&A transactions, % 13.5 2.2 Revenue growth 112.7 69.1 Revenue growth, % 19.5 13.6 Organic revenue growth is growth in existing business operations that has not come about as a result of M&A transactions. Organic growth can be achieved through increasing the service offering, new customer acquisition, growth in custom from existing customers, price increases and digitalisation. Social and healthcare outsourcing contracts won through public competitive bidding and new business locations es- tablished by the group itself are included in organic growth. REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 29 Distribution of shareholding by size range, 31.12.2022 1 ̶100 Shares per shareholder 101 ̶̶1 000 1 001 ̶̶10 000 10 001 ̶̶100 000 100 001 ̶̶500 000 500 001 ̶̶ Shares and shareholders Distribution of shareholding by size range, 31 Dec 2022 Shares per shareholder Number of shareholders % of shareholders Number of shares Percentage of shares, % 1 - 100 8,892 56.2 % 384,440 1.7 % 101 - 1 000 6,009 38.0 % 2,052,496 9.1 % 1 001 - 10 000 794 5.0 % 2,150,386 9.5 % 10 001 - 100 000 93 0.6 % 2,395,639 10.6 % 100 001 - 500 000 16 0.1 % 3,350,700 14.8 % 500 001 - 7 0.0 % 12,286,474 54.3 % Total 15,811 100.0 % 22,620,135 100.0 % of which nominee-registered shares 9 581,326 2.6 % Outstanding shares 22,620,135 100.0 % Major shareholders, 31 Dec 2022 1 LOCALTAPIOLA GENERAL MUTUAL INSURANCE COMPANY 3,481,641 15.4 % 2 MWW YHTIÖ OY 2,309,010 10.2 % 3 FENNIA MUTUAL INSURANCE COMPANY 1,998,965 8.8 % 4 LOCALTAPIOLA MUTUAL LIFE INSURANCE COMPANY 1,895,156 8.4 % 5 ELO MUTUAL PENSION INSURANCE COMPANY 1,267,161 5.6 % 6 NIEMISTÖ LEENA KATRIINA 706,110 3.1 % 7 ILMARINEN MUTUAL PENSION INSURANCE COMPANY 628,431 2.8 % 8 SKANDINAVISKA ENSKILDA BANKEN AB (PUBL), HELSINKI BRANCH 430,000 1.9 % 9 FONDITA NORDIC MICRO CAP MUTUAL FUND 325,143 1.4 % 10 OP-FINLAND SMALL CAP FUND 316,480 1.4 % 10 largest, total 13,358,097 59.1 % Other shareholders 9,262,038 40.9 % Total 22,620,135 100.0 % REPORT BY THE BOARD OF DIRECTORS |AUDITED FINANCIAL STATEMENTS 30 Distribution of shareholding by size range, 31.12.2022 Private companies Financial and insurance institutions Public entities Households Non-profit organisations Nominee registered Shareholding of the management 31 Dec 2022 Distribution of shareholding by sector, 31.12.2022 Number of shareholders % of shareholders Number of shares Percentage of shares, % Private companies 561 3.5 % 4,728,794 20.9 % Financial and insurance institutions 40 0.3 % 9,306,538 41.1 % Public entities 6 0.0 % 2,052,718 9.1 % Households 15,125 95.7 % 5,776,389 25.5 % Non-profit organisations 41 0.3 % 135,572 0.6 % Foreign shareholders 38 0.2 % 38,798 0.2 % Total 15,811 100.0 % 22,038,809 97.4 % Nominee registered 581,326 2.6 % Outstanding shares 22,620,135 100.0 % Direct holding Indirect holdings Number of shares Percentage of shares and votes Number of shares Percentage of shares and votes Board of Directors Mikko Wirén (MWW Yhtiö Oy) 2,309,010 10.2 % Mikko Wirén 5,000 0.0 % Leena Niemistö 706,110 3.1 % Hannu Juvonen 1,757 0.0 % Mika Manninen 1,757 0.0 % Heli Iisakka 949 0.0 % Seija Turunen 2,635 0.0 % Management Team Joni Aaltonen (Vendero Oy) 37,633 0.2 % Eetu Salunen 5,831 0.0 % Tarja Rantala 5,088 0.0 % Kati Raassina 17,142 0.1 % Marko Savolainen 4,002 0.0 % Timo Harju 10,694 0.1 % Antti-Jussi Aro 4,500 0.0 % Riihijärvi Sari 4,001 0.0 % Antti-Jussi Aro 4,001 0.0 % Riihijärvi Sari 4,004 0.0 % REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 31 Financial statements 1 Jan – 31 Dec 2022 CONTENTS Main statements included in the consolidated financial statements, IFRS ___ Consolidated statement of comprehensive income, IFRS 32 Consolidated statement of financial position, IFRS 33 Consolidated statement of cash flows, IFRS 34 Consolidated statement of changes in equity, IFRS 35 Notes to the consolidated financial statements, IFRS ___ Category No. Description Accounting policies 36 New and revised standards and interpretations applied in the past financial year 36 New and revised standards and interpretations to be applied in future financial years 38 Income statement 1 Revenue from contracts with customers and segment information 39 Income statement 2 Other operating income 43 Income statement 3 Materials and services 43 Income statement 4 Employee benefit expenses and the number of personnel 43 Income statement 5 Share-based incentive scheme for key personnel 44 Income statement 6 Other operating expenses and audit fees 44 Income statement 7 Depreciation, amortisation and impairment 44 Income statement 8 Financial income 45 Income statement 9 Financial expenses 45 Income statement, taxes 10 Income taxes 45 EPS 11 Earnings per share 46 Statement of financial position 12 Property, plant and equipment 46 Statement of financial position 13 Intangible assets 48 Statement of financial position 14 Right-of-use assets 51 Statement of financial position 15 Other non-current receivables 52 Statement of financial position 16 Trade receivables and other receivables (current) 53 Statement of financial position 17 Provisions 54 Statement of financial position 18 Trade and other payables 54 Balance sheet, taxes 19 Deferred tax assets and liabilities 55 Equity 20 Financial assets and liabilities by measurement category 57 Equity 21 Notes on equity 58 Equity 22 Financial liabilities 59 Equity 23 Changes in financial liabilities with no impact on cash flow 60 Equity 24 Capital management 60 Risk management 25 Financial risk management 60 Group structure 26 Business combinations 63 Group structure 27 Assets held for sale 67 Group structure 28 Subsidiaries and material non-controlling interests 67 Group structure 29 Interests in associates and joint arrangements 69 Other 30 Contingent assets and liabilities and commitments 69 Other 31 Related party transactions 70 Other 32 Events after the balance sheet date 71 Parent company financial statements, FAS ___ Parent company income statement FAS 72 Parent company balance sheet FAS 73 Parent company cash flow statement FAS 73 Parent company notes to financial statements, FAS ___ Parent company notes to financial statements, FAS 74 Date of and signatures to the report by the board of directors and the financial statements 80 ___ Auditor’s report ___ Information for shareholders ___ REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 32 Consolidated statement of comprehensive income, IFRS Note 1-12/2022 1-12/2021 EUR 1,000 Revenue 1 690,481 577,774 Other operating income 2 4,896 3,704 Materials and services 3 -267,224 -209,516 Employee benefit expenses 4 -296,572 -255,164 Other operating expenses 6 -77,164 -54,151 Share of profit in associated companies and joint ventures 29 -15 -9 EBITDA 54,401 62,638 Depreciation, amortisation and impairment 7 -45,498 -34,701 Operating profit (EBIT) 8,903 27,936 Financial income 8 721 242 Financial expenses 9 -8,074 -3,956 Financial income and expenses -7,353 -3,715 Profit before taxes 1,550 24,222 Income tax 10 6,110 -5,130 Profit for the period 7,659 19,091 Attributable to: To the owners of the parent company 9,519 20,095 To non-controlling interests -1,859 -1,004 Earnings per share calculated on the basis of the result for the period attributable to the owners of the parent company (EUR) Basic 11 0.42 0.89 Diluted 0.42 0.89 Consolidated statement of comprehensive income Note 1-12/2022 1-12/2021 1 000 euroa Profit for the period 7,659 19,091 Other comprehensive income that will be reclassified subse- quently to profit or loss Cash flow hedge 5,113 0 Income tax on other comprehensive income -1,023 0 Other comprehensive income for the reporting period 4,090 0 Total comprehensive income for the reporting period 11,750 19,091 Attributable to: To the owners of the parent company 13,609 20,095 To non-controlling interests -1,859 -1,004 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 33 Consolidated statement of financial position, IFRS EUR 1,000 Note 31 Dec 2022 31 Dec 2021 ASSETS Non-current assets Property, plant and equipment 12 58,738 44,989 Goodwill 13 251,032 188,909 Other intangible assets 13 22,803 14,866 Right-of-use assets 14 197,746 95,586 Interests in associates 29 2,369 308 Other investments 867 1,176 Other receivables 15 9,160 5,211 Deferred tax assets 19 17,324 5,484 Total non-current assets 560,039 356,529 Current assets Inventories 3 4,309 3,705 Trade and other receivables 16 76,806 92,143 Current tax assets 2,103 433 Cash and cash equivalents 13,128 4,257 Current assets held for sale 27 5,255 0 Total current assets 101,601 100,537 Total assets 661,639 457,066 EUR 1,000 Note 31 Dec 2022 31 Dec 2021 EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital 80 80 Fair value reserve 4,090 Reserve for invested unrestricted equity 116,520 116,520 Retained earnings 3,290 2,501 123,981 119,101 Non-controlling interests -1,092 3,510 Total equity 21 122,888 122,611 Deferred tax liabilities 19 8,512 5,884 Provisions 17 89 134 Lease liabilities 22 201,235 87,857 Financial liabilities 20 168,031 91,445 Other non-current liabilities 816 1,002 Total non-current liabilities 378,685 186,321 Trade and other payables 18 127,529 125,107 Current tax liabilities 30 3,282 Provisions 17 71 Lease liabilities 22 28,338 18,392 Financial liabilities 20 3,090 1,283 Current liabilities held for sale 27 1,081 Total current liabilities 160,067 148,135 Total liabilities 538,751 334,455 Total equity and liabilities 661,639 457,066 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 34 Consolidated statement of cash flows, IFRS EUR 1,000 Note 1-12/2022 1-12/2021 Cash flow from operating activities Profit for the period 7,659 19,091 Taxes -6,110 5,130 Depreciation, amortisation and impairment 45,498 34,701 Financial income and expenses 7,371 3,724 Other -121 -45 Net cash generated from operating activities before change in working capital 54,299 62,601 Change in working capital 16,761 -3,336 Interest received 714 235 Taxes paid -6,892 -2,564 Net cash flow from operating activities 64,882 56,936 Cash flow from investing activities Investments in tangible and intangible assets -29,033 -14,833 Proceeds from disposal of property, plant and equipment and intangible assets and prepayments 408 526 Changes in other receivables and investments -1,775 -1,350 Granted loans -738 0 Dividends received 7 7 Acquisition of subsidiaries less cash and cash equivalents at date of acquisition 26 -52,308 -16,414 Net cash flow from investing activities -83,439 -32,064 Cash flow from financing activities Changes in non-controlling interests -408 -3,017 Acquisition of own shares -1,475 -582 Proceeds from and repayment of borrowings 23 0 0 Proceeds from long-term borrowings 23 204,000 20,000 Repayment of long-term borrowings 23 -128,779 -21,584 Repayment of lease liabilities 23 -29,014 -19,822 Interest and other operational financial expenses -8,307 -3,986 Dividends paid and other profit distribution -8,589 -4,932 Net cash flow from financing activities 27,429 -33,923 Changes in cash and cash equivalents 8,871 -9,050 Cash at beginning of period 4,257 13,306 Cash at end of period 13,128 4,257 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 35 Consolidated statement of changes in equity, IFRS Equity attributable to owners of the parent company EUR 1,000 Note Share capital Reserve for invested unrestricted equity Fair value reserve Retained earnings Non-controlling interests Equity Total Total equity, 1 Jan 2021 80 116,520 -7,633 5,223 114,190 Profit for the period 20,095 -1,004 19,091 Dividends paid -4,517 -315 -4,832 Acquisition of own shares -582 -582 Share-based benefits 14 14 Total transactions with owners -5,085 -315 -5,400 Changes in NCI without a change in control 26 -4,875 -395 -5,270 Total changes in subsidiary shareholdings -4,875 -395 -5,270 Total equity, 31 Dec 2021 80 116,520 2,501 3,510 122,611 Equity attributable to owners of the parent company EUR 1,000 Note Share capital Reserve for invested unrestricted equity Fair value reserve Retained earnings Non-controlling interests Equity Total Total equity, 1 Jan 2022 80 116,520 2,501 3,510 122,611 Profit for the period 9,519 -1,859 7,659 Total comprehensive income for the period 25 4,090 4,090 Dividends paid -6,767 -2,987 -9,754 Acquisition of own shares -1,475 -1,475 Share-based benefits -49 -49 Investments in group subsidiaries, reported 41 41 Total transactions with owners -8,290 -2,945 -11,236 Changes in NCI without a change in control 26 -610 202 -408 Other changes 172 172 Total changes in subsidiary shareholdings -439 202 -236 Total equity, 31 Dec 2022 80 116,520 4,090 3,290 -1,092 122,888 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 36 Accounting policies Company profile Pihlajalinna is one of the leading private social and healthcare service providers in Finland. The Group serves private persons, companies, insurance companies and public sector entities. Pihlajalinna provides a broad range of social and healthcare services as well as wellbeing services. The service selection includes general practitioner and medi- cal specialist services, occupational healthcare, social and healthcare outsourcing, fitness centre services, responsible doctor and remote consultation services as well as residential services and staffing ser- vices. At the end of the financial year, the total number of Pihlajalinna’s private clinics, hospitals, dental clinics, fitness centres and service housing units with 24-hour assistance was approximately 140. In ad- dition, Pihlajalinna has four major complete social and healthcare outsourcing agreements that collectively cover some 60 locations (in- cluding health centres, maternity and child health clinics, service housing units with 24-hour assistance and daytime activity centres). The Group’s parent company, Pihlajalinna Plc , is a Finnish public limited company established under the laws of Finland, whose Business ID is 2617455-1. The company is domiciled in Tampere , and its registered address is Kehräsaari B, FI-33200 Tampere, Finland . Pihlajalinna Plc ’s shares are listed on the NASDAQ OMX Helsinki main market. A copy of the consolidated financial statements is available on the internet at investors.pihlajalinna.fi or can be obtained at the head office of the Group’s parent company, address Kehräsaari B, 33200 Tampere, Finland . The Board of Directors of Pihlajalinna Plc approved these financial statements in its meeting on 16 February 2023. In accordance with the Finnish Limited Liability Companies Act, the shareholders may adopt or reject the financial statements at the Annual General Meet- ing held after their publication. The Annual General Meeting can also decide on modifications to be made to the financial statements. Basis of preparation The consolidated financial statements have been prepared in accord- ance with the International Financial Reporting Standards (IFRS), and their preparation complies with the IAS and IFRS as well as SIC and IFRIC interpretations effective on 31 December 2022. International Fi- nancial Reporting Standards, as intended in the Finnish Accounting Act and the regulations issued pursuant to the Act, refer to the stand- ards that have been approved for application within the EU in accord- ance with Regulation (EC) No. 1606/2002 and interpretations thereof. The notes to the consolidated financial statements also comply with the Finnish accounting and company legislation that complements the IFRS regulations. Accounting policies that influence a particular note to the consoli- dated financial statements are indicated with the heading Accounting policies in the note in question. The consolidated financial statements are presented in euros and all figures are rounded to the nearest thousand, unless otherwise specified. New and amended standards applied in the past financial year The Group has applied the following standards, which are already in effect, for the first time in its IFRS reporting: IFRS 9 Financial Instruments – Hedge Accounting During the financial year 2022, the Group begun to apply hedge accounting in respect of an interest rate swap entered into during the financial year 2022. During the financial year 2022, the Group entered into an interest rate swap agreement with a nominal value of EUR 65 million to hedge its floating rate financing arrangement. The interest rate swap is subject to cash flow hedge accounting. The accounting policies concerning hedge accounting are described in more detail in note 25 Financial risk management . IFRS 5 Non-current Assets Held for Sale and Discontinued Opera- tions Pihlajalinna has classified its dental health services as assets held for sale effective from 31 December 2022. The accounting policies are described in more detail in note 27 Assets held for sale . Starting from the beginning of 2022, the Group has applied the fol- lowing new and amended standards (effective for financial years starting on or after 1 January 2022): Amendments to IAS 37 Provisions, Contingent Liabilities and Contin- gent Assets – Onerous Contracts – Costs of Fulfilling a Contract When an onerous contract is accounted for based on the costs of ful- filling the contract, the amendments clarify that these costs comprise both the incremental costs and an allocation of other direct costs. The amendments to the standard have not had a material effect on Pihlajalinna’s consolidated financial statements. Other new or amended standards that entered into effect on 1 Janu- ary 2022 did not have a material effect on Pihlajalinna’s consolidated financial statements. Consolidation principles Subsidiaries Subsidiaries are entities in which the Group exercises control. The Group has control of an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the abil- ity to affect those returns through its power over the entity. Intragroup shareholdings are eliminated using the acquisition method. The consideration transferred and the acquired entity’s identifiable assets and assumed liabilities are measured at fair value at the date of acquisition. Acquisition-related costs are expensed. Any contingent consideration is measured at fair value at the date of ac- quisition and classified as a liability. If the initial accounting for a busi- ness combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports in its financial state- ments provisional amounts for the items for which the accounting is incomplete. During the measurement period, the Group retrospec- tively adjusts the provisional amounts recognised at the acquisition date to reflect any new information. The measurement period may not exceed one year from the acquisition date. A contingent consider- ation classified as a liability is measured at fair value at the end of each reporting period, and any resulting gain or loss is recognised in profit or loss after the end of the measurement period. Non-controlling interests in the acquiree are recognised either at fair value or an amount that corresponds to their pro rata share of the acquiree’s net assets. The amount by which the consideration REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 37 transferred, non-controlling interests in the acquiree and previously owned holding combined exceed the fair value of the acquired net as- sets is recognised as goodwill in the consolidated statement of finan- cial position. If the combined value of the consideration, non-control- ling interests and previously owned holding is lower than the fair value of the acquiree’s net assets, the difference is recognised in the statement of comprehensive income. Acquired subsidiaries are consolidated from the date when the Group obtained control, and disposed subsidiaries are consolidated until the date when the Group lost control. All intragroup transac- tions, receivables, liabilities, unrealised profits and internal profit dis- tribution are eliminated in the preparation of the consolidated finan- cial statements. Unrealised losses will not be eliminated in case of im- pairment losses. Profit or loss for the financial year attributable to the owners of the parent company and to the non-controlling interests is presented in the consolidated statement of comprehensive income. Comprehensive income is attributed to the owners of the parent company and to the non-controlling interests, even if this would lead to a situation where the portion attributable to the non-controlling interests is negative. The portion of equity attributable to the non- controlling interests is presented as a separate item under equity in the consolidated statement of financial position. Such changes in the parent company’s ownership interest in a subsidiary that do not lead to loss of control are treated as equity transactions. In connection with step-by-step acquisitions, the former ownership interest is measured at fair value, and the resulting gain or loss is rec- ognised in profit or loss. When the Group loses control of a subsidi- ary, any remaining interest is measured at fair value at the date of loss of control, and the resulting difference is recognised in profit or loss. Associates and joint arrangements Associates are companies over which the Group has significant influ- ence. As a rule, significant influence is established when the Group holds more than 20% of a company’s voting power or otherwise has significant influence but no control. A joint arrangement is an arrangement of which two or more par- ties have joint control. Joint control involves contractually agreed sharing of control of an arrangement, which exists only when deci- sions about relevant activities require the unanimous consent of the parties sharing control. A joint arrangement is either a joint operation or a joint venture. A joint venture is an arrangement whereby the Group has rights to the net assets of the arrangement, whereas in a joint operation the Group has rights to the assets, and obligations for the liabilities, relating to the arrangement. Associates and joint ventures are consolidated using the equity method. If the Group’s share of the loss of an associate or a joint ven- ture exceeds the carrying amount of the investment, then the invest- ment is carried at zero value, and the losses exceeding the carrying amount are not consolidated, unless the Group is committed to ful- filling the obligations of the associate or joint venture. An investment in an associate or a joint venture includes the goodwill generated through the acquisition. Unrealised profits between the Group and an associate or a joint venture are eliminated in proportion to the Group’s ownership interest. The Group’s pro rata share of an associ- ate’s or a joint venture’s profit for the financial year is included in op- erating profit. The Group owns 31% in Kiinteistö Oy Levin Pihlaja, which is consoli- dated as a joint operation according to the pro rata share, using the proportionate consolidation method. Foreign currency translation The consolidated financial statements are presented in euros, which is the functional currency and presentation currency of the Group’s parent company and of the subsidiaries engaged in business activi- ties. In their own accounting, Group companies translate day-to-day transactions denominated in foreign currency into their functional currency applying the exchange rates of the transaction date. Foreign exchange gains and losses related to the business are included in the corresponding expense items. Segment reporting Pihlajalinna’s CEO is the Group’s chief operating decision maker. The CEO monitors the Group’s result and makes significant operating de- cisions at the Group level. The Group operates only in Finland and its management system is based on a regional organisation structure. Under Pihlajalinna’s operating structure, the Group’s CEO, with the help of the Chief Operating Officers and the other members of the Management Team, is responsible for the Group’s business opera- tions and service offering to both the private and public sectors. The Chief Operating Officers prepare budgets for the Group’s businesses with the help of regional directors and the managing directors of the municipal companies. The Group CEO is responsible for the resources, investments and profitability of the Group’s businesses. Pihlajalinna’s group of cash-generating units corresponds to the reporting segment, i.e. the Group level. Group-level figures are reported as segment in- formation. The Group CEO uses the key figures from the IFRS financial state- ments in reporting on the Group’s result. The Group CEO assesses the result and profitability on the basis of the adjusted EBIT and adjusted EBITDA, and the reporting of the result complies with the accounting principles applied in the consolidated financial statements. The ad- justment items for the adjusted EBIT and adjusted EBITDA are speci- fied in Note 24 Capital management . Adjustments to EBITDA amounted to EUR 9.8 (2.7) million for the financial year, while adjust- ments to EBIT totalled EUR 9.7 (2.4) million. Accounting policies requiring management judge- ment and major sources of estimation uncertainty In the course of preparing the financial statements, it is necessary to make estimates and assumptions about the future. However, such es- timates and assumptions may later prove inaccurate compared with actual outcomes. The Group regularly monitors the realisation of the estimates and assumptions and changes in the underlying factors to- gether with the business units by using several, both internal and ex- ternal, sources of information. Any changes in estimates and assump- tions are recognised in the financial year during which the estimate or assumption is corrected and in all subsequent financial years. Addi- tionally, it is necessary to exercise judgement in the application of the accounting policies. Information on the key uncertainties based on assumptions and es- timates that give rise to a significant risk of a material change in the carrying amounts of assets and liabilities during the next financial year, and the decisions based on the management’s judgement that Pihlajalinna’s management has made in applying the accounting poli- cies to the consolidated financial statements and which have the most impact on the figures presented in the consolidated financial statements, is presented in the following sections: Note Assumptions used concerning the profitability of the Group’s fixed-term complete social and healthcare ser- vices outsourcing agreements 1 Assumptions used in impairment testing 13 Assumptions related to the measurement of trade receiv- ables 16 Assumptions used in the recognition of deferred tax as- sets 19 Fair value measurement of assets and liabilities acquired in business combinations and contingent considerations 26 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 38 New and revised standards and interpretations to be applied in future financial years The International Accounting Standards Board has published the fol- lowing new or amended standards and interpretations which the Group has not yet applied, but which are expected to have an effect on the consolidated financial statements. The Group will adopt them as from the effective date of each standard and interpretation, or if the effective date is some date other than the first day of the finan- cial year, as from the beginning of the financial year that first follows the effective date. * = The regulation in question was not approved for application in the EU by 31 December 2022. Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements (Effective for annual periods beginning on or after 1 January 2023, early application is permitted) The amendments clarify the application of the materiality principle to disclosures of accounting policies. Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Effective for annual periods beginning on or after 1 January 2023, early application is permitted) The amendments clarify how reporting entities should separate changes in accounting policies from changes in accounting estimates. The amendments are focused on clarifying the definition of an ac- counting estimate. Amendments to IAS 12 Income Taxes concerning the recognition of deferred tax assets and liabilities (Effective for annual periods beginning on or after 1 January 2023) The amendments narrow the initial recognition exemption and clarify that the exemption does not apply to transactions such as leases and decommissioning obligations which give rise to equal and offsetting temporary differences. Amendments to IFRS 16 Leases (Effective for annual periods beginning on or after 1 January 2024, early application is permitted) The amendments introduce a new accounting model for variable pay- ments and will require seller-lessees to reassess and potentially re- state sale-and-leaseback transactions entered into since 2019. Amendments to IAS 1 Presentation of Financial Statements (Effective for annual periods beginning on or after 1 January 2024, early application is permitted) The amendments aim to promote consistency in application and clar- ify the requirements on determining whether a liability is current or non-current. The amendments specify that covenants to be complied with after the reporting date do not affect the classification of debt as current or non-current at the reporting date. The amendments re- quire the disclosure of information about such covenants in the notes to the financial statements. Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (available for optional application, effective date deferred indef- initely) The amendments address the conflict between the existing guidance on consolidation and equity accounting and require the full gain to be recognised when the assets transferred meet the definition of a busi- ness under IFRS 3 Business Combinations. The new or amended standards listed above, or other new or amended standards, are not expected to have a significant effect on Pihlajalinna’s consolidated financial statements. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 39 Notes to the consolidated financial statements, IFRS 1. Revenue from contracts with customers Accounting policies The Group’s revenue consists of payments related to the sale of healthcare services, social services and wellbeing services measured at fair value, adjusted by any variable consideration. The healthcare services provided by the Group consist of occupational health services, services provided at private clinics and hospi- tals, responsible doctor services, diagnostics services, rehabilitation services and dental care services. The social services provided by the Group consist of services for the elderly and the disabled, mental health ser- vices and substance abuse group services. A significant part of the consolidated revenue consists complete social and healthcare outsourcing, which also includes the provider’s liability for the costs of specialised care. The Group produces recruitment services related to healthcare professionals. The Group’s Forever fit- ness centres offer diverse wellbeing services for adults who exercise. Fitness centre services complement Pihlajalinna’s preventive occupational healthcare services and rehabilitation services carried out after spe- cialised care procedures. Pihlajalinna’s services are also extensively available via digital channels. The Group recognises revenue from services produced by employees and independent practitioners on a gross basis, i.e. based on total customer invoicing, and the fees charged to the Group by independent practitioners are recognised in the income statement item External services, practitioners. As Pihlajalinna has primary responsibility for the provision of services to its customers, and the Group is exposed to signifi- cant risks and benefits related to the sale of services, the Group acts as a principal with regard to practition- ers with whom it has a contractual relationship. IFRS 15 Revenue from Contracts with Customers includes a five-step model that defines when, and at what amount, revenue from contracts with customers is recognised. Revenue can be recognised over time or at a point in time, and the transfer of control is the key criterion. The primary performance obligations for Pihlajalinna’s various revenue streams are as follows: Social and healthcare outsourcing ● statutory social and healthcare services for a municipality’s residents, separately described in contracts with customers, including possible public specialised care ● individual social and healthcare service visits by residents of other municipalities Private clinics and dental care ● individual customer visits to healthcare services at operating locations or digitally, including related sup- port services Surgical operations ● individual visits and related support services (e.g. private individuals who pay for their services them- selves or through insurance companies) Occupational healthcare ● individual occupational healthcare customer visits (e.g. appointments with occupational healthcare nurses and doctors, laboratory tests) at operating locations or digitally ● preventive and health-promoting separately agreed services (e.g. occupational health check-ups, work- place-specific occupational health surveys) ● other additional services agreed upon with the customer (e.g. first aid course) Fitness centre services ● obligations related to monthly and annual fees for fitness centre services ● individual separately charged additional services Recruitment services ● customer-specific monthly fees for recruitment services ● individual separately charged recruitment services Responsible doctor services ● location-specific daily charges described in the customer agreement Staffing service ● selling a healthcare professional’s labour event-specifically or based on time ● customer-specific monthly fees for emergency and on-call services REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 40 Residential services ● elderly care home services on each day covered by the agreement ● individual separately charged additional services or health centre visits Digital services ● Remote doctor services ● Remote nurse services ● Other digital services related to appointment booking and assessing the need for care, other digital ser- vices ordered by the customer The services promised in a contract are treated as a single series of distinct services comprised perfor- mance obligation when the services provided are repeated in the same manner with respect to their sub- stantial aspects and whose transfer to the customer takes place over time. The performance obligation in the Group’s social and healthcare outsourcing arrangements is the municipality’s statutory social and healthcare service operations described in the customer agreement. The Group’s customer contracts for the outsourcing of social and healthcare services are considered to consist of a single performance obligation in which the services provided by the Group are combined into a bundle of services. Transaction prices mainly comprises individual services according to the price list or annual, monthly, daily or hourly rates based on customer contracts. The outsourcing agreements are, as a rule, based on a fixed annual price. In most cases, the price concerns an individual performance obligation. In some cases, the price includes a variable component of consideration (e.g. discount, penalty charge, bonus, additional price, additional service), which is allocated to one or more performance obligations in proportion to their separate selling prices. The Group assesses the effect of the variable components on the amount of revenue recognised using historical data, for example, and recognises them at the most likely amount. The recogni- tion of revenue from the Group’s complete social and healthcare services outsourcing agreements may be- come more accurate with a delay and may also include variable consideration. The Group may not always be aware of the actual costs of the agreements, which may also affect revenue recognition. The performance obligations are fulfilled either over time (e.g. outsourcing, residential services, fitness centre services, recruitment services, responsible doctor services, fixed-price occupational health services) or at a point in time (e.g. occupational healthcare services, individual customer visits, additional services). In the services, the customer simultaneously receives and consumes the benefit from Pihlajalinna’s perfor- mance. Revenue is recognised on the reporting date at the amount that Pihlajalinna considers itself to be enti- tled to in exchange for the services delivered. Sales revenue from individual services is recognised at a point in time according to the time of the appointment or the use of the service. Revenue from outsourcing agree- ments for social and healthcare services under fixed annual prices is recognised over time. In outsourcing arrangements, the customer simultaneously receives and consumes the benefit from the service, which means that the conditions for recognising revenue over time are met. The variable consideration and costs recognised on the reporting date are partly based on estimates of their amounts. The payment terms and periods included in the contracts vary, but the payment periods are typically less than one year. The contracts do not include significant financing components or additional expenditure aris- ing from contractual receivables. In connection with outsourcing agreements, the client may provide Pihlajalinna, without financial consid- eration, with use of publicly owned infrastructure, or part there of, which Pihlajalinna operates in service production under the outsourcing agreement. The IFRIC 12 Service Concession Arrangements interpretation is applied to the recognition of outsourcing agreements if the out-sourcing party decides on the scope and pricing of the services provided by Pihlajalinna and Pihlajalinna returns the infrastructure, free of charge, at the conclusion of the outsourcing agreement. In such cases, Pihlajalinna is not considered to have control over assets received without consideration from a public-sector entity. Timing of the satisfaction of performance obligations EUR 1,000 2022 2021 At a point in time 318,950 223,856 Over time 371,531 353,918 Total 690,481 577,774 Key accounting estimates and decisions based on management judgement During the financial year, the management used particular judgment with regard to the measurement and recognition of variable consideration and legal claims related to complete outsourcing agreements for social and healthcare services. The exact actual costs of the Group’s fixed-term complete outsourcing agreements for social and healthcare services are not always known to the Group on the reporting date, and the agree- ments may also include variable components. Consequently, the reported profitability of such agreements may be specified with a delay, and the actual outcomes may deviate from the estimates made by the man- agement on the reporting date. The cost accumulation of public specialised care also involves random fluc- tuation. In addition, individual cases falling within the scope of the hospital districts’ pooling system for high-cost care may influence the cost liability of specialised care considerably during the financial year, and between financial periods, in Pihlajalinna’s municipal companies. The fixed-term service agreements for all of the Group’s complete outsourcing arrangements are highly similar with regard to their principles and basic terms. Pihlajalinna has calculated and recognised the varia- ble compensation components and cost compensation under the agreements using the same criteria and model for all clients. Demands for the compensation of cost increases due to changes in services to corre- spond to the actual costs and investment costs that serve operations after the end of the term of the con- tract being the client’s responsibility constitute the majority of costs and variable compensation compo- nents that are specified with a delay. For 2022, the detailed specification of investment costs and COVID-19 related costs included in invoicing by hospital districts can only be carried out after the hospital districts have published their financial statements. Pihlajalinna has recognised only part of these legally justified claims in its income statement. The parties to the agreements are bound by an obligation to negotiate and negotiation is the primary procedure. If the REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 41 obligation to negotiate does not lead to payment, the receivables are sought through legal action, which may further delay the collection of items presented in current receivables in the financial statements. Items that may, according to the management’s estimate, influence the profitability of com- plete outsourcing agreements with a delay: On 4 April 2022, the District Court of Central Finland handed down its ruling on the dispute concerning the service agreement between Jämsän Terveys Oy and the City of Jämsä. The ruling is not final. As a result of adjustments recognised in accordance with the court’s ruling, the profit attributable to the owners of Pihla- jalinna Group’s parent company decreased by EUR 2.8 million for the financial year. The ruling decreased revenue by EUR 2.4 million, and EBITDA was reduced by EUR 4.6 million. The City of Jämsä owns 49 per cent of the company and Pihlajalinna 51 per cent. Earnings per share were weakened by EUR 0.12 per share by the ruling. The ruling did not have an immediate material impact on cash flow. For the sake of comparabil- ity, the effects of the District Court's ruling have been processed as adjustment items. Jämsän Terveys has filed an appeal regarding the District Court’s ruling to the Court of Appeal. The operating preconditions for Jämsän Terveys’ service production have been secured with an efficiency improvement programme and temporary parent company funding. During the financial year, Jämsän Terveys Oy has recognised as revenue and recorded in its receivables EUR 1.2 million, mainly COVID-19-related costs for the current year, which the client has not paid in breach of the service agreement. In addition, a difference of opinion has emerged between the company and the City during the financial year on the impact of the transfer of personnel on the annual fee under the service agreement. The parties are actively engaged in negotiations with a view to resolving outstanding issues. The above matters have been agreed with the new client, i.e. the Wellbeing Services County of Central Finland, as presented to the City of Jämsä as of 1 January 2023. The total amount of contractually and legally justified variable compensation from the City of Mänttä- Vilppula that Mäntänvuoren Terveys Oy has recognised as revenue and recorded in its receivables amounts to EUR 4.3 (4.1) million. The variable compensation recognised as revenue in accordance with the agree- ment includes an estimate of compensation for specialised care costs to the service provider of the Pir- kanmaa Hospital District’s investment costs allocated to the client. The receivables from variable compensa- tion components are also related to cost increases caused by service changes and compensating such in- creases in accordance with the actual costs. A preliminary agreement has been made with the new client, i.e. the representatives of the Wellbeing Services County of Pirkanmaa, to transfer the cost liability of de- manding specialised care away from the company. The total amount of contractually and legally justified variable compensation from the City of Parkano that Kolmostien Terveys Oy has recognised as revenue and recorded in its receivables amounts to EUR 1.3 (1.7) million. The amount has been influenced by the decision of the Parkano City Council on 26 September 2022 to allocate an additional appropriation to the budget of the basic welfare committee for 2022. The var- iable compensation recognised as revenue in accordance with the agreement includes an estimate of com- pensation for specialised care costs to the service provider of the Pirkanmaa Hospital District’s investment costs allocated to the client. Other receiv-ables from variable compensation are mainly related to COVID-19 cost compensation for 2022. The client has already previously approved cost increases arising from changes to services for the elderly as part of the annual fee under the service agreement. A preliminary agreement has been made with the new client, i.e. the representatives of the Wellbeing Services County of Pirkanmaa, to transfer the cost liability of demanding specialised care away from the company. The total amount of contractually and legally justified variable compensation that the lead contracting partner for complete outsourcing Pihlajalinna Terveys Oy has recognised as revenue and recorded in its re- ceivables amounts to EUR 0.6 (0.2) million. The Group's receivables include the above-mentioned items totalling EUR 7.4 (9.8) million. Contractual assets and liabilities There may be differences in timing between revenue recognition and invoicing. The Group recognises a con- tractual asset when revenue is recognised before invoicing and, correspondingly, a contractual liability when revenue is recognised after invoicing. The sales accrual information previously presented in the mate- rial items of deferred assets and deferred liabilities in the notes to trade receivables and trade payables are now presented as either contractual assets or contractual liabilities. Summary of contractual items EUR 1,000 2022 2021 Trade receivables 54,568 79,701 Contract assets Current 6,052 6,661 Contract liabilities Current 3,237 920 The amount of revenue recognized during the financial year that was included in contract liabilities at the beginning of the period: EUR 1,000 2022 2021 Revenue recognized from amounts included in contract liaibilities 920 909 Revenue by region Pihlajalinna reports its sales revenue divided into the following geographical regions: ● Southern Finland includes Pihlajalinna’s business operations in the regions of Uusimaa, South West Fin- land, Päijät-Häme, Kymenlaakso and South Karelia. ● Mid-Finland includes Pihlajalinna’s business operations in the regions of Pirkanmaa, Satakunta, Kanta- Häme, Central Finland, South Savo, North Karelia and North Savo. ● Ostrobothnia includes Pihlajalinna’s business operations in the regions of Southern Ostrobothnia, Ostro- bothnia and Central Ostrobothnia. ● Northern Finland includes Pihlajalinna’s business operations in the regions of North Ostrobothnia, Kainuu and Lapland. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 42 EUR 1,000 2022 % 2021 % Southern Finland 164,073 21% 148,291 23% Mid-Finland 374,741 49% 330,820 51% Ostrobothnia 132,465 17% 128,335 20% Northern Finland 43,440 6% 29,934 5% Other operations 49,267 6% 13,374 2% Intra-Group sales -73,505 -72,980 Consolidated revenue 690,481 100% 577,774 100% Sales revenue by customer group Pihlajalinna’s customer groups are corporate customers, private customers and public sector customers. ● The Group’s corporate customer group consists of Pihlajalinna’s occupational health customers, insur- ance company customers and other corporate contract customers. ● The Group’s private customers are private individuals who pay for services themselves and may subse- quently seek compensation from their insurance company. ● The Group’s public sector customer group consists of public sector organisations in Finland, such as mu- nicipalities, joint municipal authorities, congregations, hospital districts and the public administration when purchasing social and healthcare outsourcing services, residential services, occupational health ser- vices and staffing services. EUR 1,000 2022 % 2021 % Corporate customers 225,270 33 137,773 21 of which insurance company customers 98,447 14 34,798 5 Private customers 103,243 15 85,320 13 Public sector 435,476 63 427,661 66 of which complete outsourcing 303,902 44 300,813 46 of which staffing 24,797 4 26,073 4 of which occupational healthcare and other services 106,777 15 100,775 15 Intra-Group sales -73,508 -72,980 Consolidated revenue 690,481 100 577,774 100 Information on key customers The Group’s sales revenue from the four largest customers totalled approximately EUR 281.4 (277.9) mil- lion, representing approximately 41% (48%) of the consolidated revenue. Estimate of unsatisfied performance obligations related to Group’s social and healthcare out- sourcing arrangements, EUR million: EUR 1,000 31 Dec 2022 31 Dec 2021 EUR 1,000 31 Dec 2022 31 Dec 2021 2022 263 2031 30 37 2023 245 266 2032 7 6 2024 249 269 2033 7 6 2025 226 247 2034 7 6 2026 177 199 2035 7 6 2027 179 201 2028 182 204 2029 184 206 2030 156 167 1,656 2,083 Service provider – client First year of service production under the current con- tract Duration of contract (years) Jämsän Terveys Oy - Jämsän kaupunki 2015 10 Kuusiolinna Terveys Oy - KuusSote 2016 15 Mäntänvuoren Terveys Oy - Mänttä-Vilppulan kaupunki 2016 15 Kolmostien Terveys Oy - Parkanon kaupunki 2015 15 Bottenhavets Hälsa Ab - Selkämeren Terveys Oy - Kristiinankaupunki 2021 15 - 20 years As part of the new legislation governing social and healthcare services in Finland, the responsibility for or- ganising social and healthcare services was transferred to the newly established wellbeing services coun- ties on 1 January 2023. In connection with this change, agreements previously signed by municipalities were transferred in accordance with the responsibility for service provision. Pursuant to the legislation concerning the reform of social and healthcare services, the wellbeing services counties are required to indicate by the end of 2023 whether their subcontracting agreements will continue. According to the as- sessment of the company’s management, its fixed-term service agreements will remain in effect, as agreed, with the wellbeing services counties until the end of the term for each agreement. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 43 2. Other operating income Accounting policies Government grants received as compensation for expenses already incurred are recognised in profit or loss for the period in which they become receivable. These grants are presented under other operating income. Government grants related to capitalised development projects are recognised as deductions from the car- rying amounts of intangible assets, when there is reasonable assurance that such grants will be received and that the Group will comply with the conditions for receiving them. The grants will be recognised as income over the useful life of an asset by way of reduced depreciation. The Group has subleased certain premises that are not used for business operations. Income from these leases is presented under other operating income. Sale and leaseback With regard to sale and leaseback agreements completed prior to the adoption of IFRS 16, the Group will continue the allocation of capital gains as before in accordance with the transition provision of IFRS 16. If a finance lease is created as a result of a sale and leaseback agreement, the difference between the car- rying amount and the sales price will be recognised in the consolidated statement of financial position and recognised as income over the lease term under other operating income. The unrecognised portion of the difference between the carrying amount and the sales price is presented as Other liabilities in the statement of financial position. EUR 1,000 2022 2021 Capital gains on property, plant and equipment 275 209 Rental income 503 528 Government grants 1,339 1,160 Other income items 2,779 1,807 Total 4,896 3,704 Effects of COVID-19 In June 2020, the Finnish Government decided on support for business costs for companies that had suf- fered a significant decrease in revenue due to the COVID-19 pandemic and that have had costs that are diffi- cult to adjust. In 2022, the Finnish Government carried out the fifth round of cost support for companies. In the financial year 2022, Pihlajalinna recorded in the other operating income in the government grants EUR 488 thousand cost support for covering the fixed costs of the Group’s fitness centres. In 2021, Pihlajalinna received EUR 628 thousand in cost support for covering the fixed costs of the Group’s fitness centres. Compensation for the costs of pandemic-related services under the Group’s complete outsourcing agree- ments is presented in other operating income under other income items. Agreement on the compensation principles was reached with the client municipalities in 2021. Municipalities and joint municipal authorities are compensated for costs directly related to the COVID-19 pandemic by means of government grants. 3. Materials and services Accounting policies Inventories are measured at acquisition cost or lower probable net realisable value. EUR 1,000 2022 2021 Materials -30,975 -20,452 Change in inventories 648 153 External services, practitioners -112,527 -73,042 External services, other -124,370 -116,176 Total -267,224 -209,516 4. Employee benefit expenses Accounting policies Pension plans are classified as defined benefit plans and defined contribution plans. The Group only has de- fined contribution plans. In defined contribution plans, the Group makes fixed payments to a separate unit. The Group has no legal or constructive obligation to make additional payments if the recipient of the pay- ments is incapable of paying out said retirement benefits. Payments made into the defined contribution plans are recognised in profit or loss for the financial year for which they are charged. The long-term share-based incentive scheme is recognised as an expense over its accrual period. The gross amount of the incentive scheme includes the share component and the cash component. Approximately half of the gross remuneration, corresponding to withholding taxes, is paid in cash. Information on related party employee benefits and loans are presented in Note 31 Related party transactions. EUR 1,000 2022 2021 Wages and salaries -245,289 -211,095 Share-based incentive schemes - implemented as shares -97 -357 Pension costs - defined contribution plans -42,010 -35,344 Other social security expenses -9,176 -8,368 Total -296,572 -255,164 Number of personnel 2022 2021 Personnel on average (FTE) 5,167 4,746 Personnel at the end of the period (NOE) 7,016 6,297 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 44 5. Share-based incentive scheme for key personnel At its meeting on 23 March 2022, the Board of Directors approved the terms of a share-based incentive pro- gram (LTIP 2022) for the key persons of the company. In its entirety the incentive scheme is to form a six- year program and the share rewards based on the program are not allowed to be disposed of prior to year 2025. In addition, in order to participate to the program, a key person must invest into Pihlajalinna shares. Performance and quality-based share program shall comprise of four separate performance periods of one year each (calendar years 2022, 2023, 2024 and 2025). Potential share rewards shall be paid out after the performance periods in years 2023, 2024, 2025 and 2026 provided that the performance and quality- based targets as set by the board are reached. The maximum number of shares (gross amount prior to de- duction of applicable withholding tax) for each one year performance period is defined in the allocation per participant. Shares paid off as share rewards shall be subject to a two-year transfer restriction. The criteria for the performance and quality based additional share program are adjusted EBITA as well as key operative and quality indicators of Pihlajalinna Group. A total of 42 key persons are entitled to participate to the share-based incentive program. In case all the persons entitled to participate do participate to the program by meeting the condition of investment in full and in case the performance targets set to the program are achieved in total, the total amount of the share rewards payable under the program is a maximum of approximately 1,100,000 shares (gross amount prior to the deduction of applicable withholding tax) and the total value of the share reward pro-gram is approxi- mately EUR 12.8 million. In case the program materializes in full, the above amount of shares equals approx- imately to 4.8 per cent of the total amount of the shares of the company. No performance- and quality-based share rewards materialised for the first performance period 2022 pursuant to the incentive plan, as the minimum objectives set for the programme were not achieved. 6. Other operating expenses EUR 1,000 2022 2021 Voluntary indirect employee costs -7,896 -4,997 Facility expenses -14,309 -9,908 Vehicle operating costs -913 -664 Information management expenses -26,170 -17,531 Machinery and equipment expenses -7,061 -5,040 Travel expenses -2,867 -2,383 Sales and marketing expenses -6,441 -5,449 Other expenses -11,508 -8,180 Total -77,164 -54,151 Facility expenses Auditing, KPMG Oy Ab -343 -288 Statements, KPMG Oy Ab -20 -10 Non-audit services, KPMG Oy Ab -51 Total -414 -298 7. Depreciation and impairment Accounting policies Property, plant and equipment will be depreciated using the straight-line method over their estimated eco- nomic useful lives. The estimated economic useful lives are as follows: Buildings 10–25 years Renovation expenses on real estate 5–10 years Machinery and equipment 3–10 years Other tangible assets 3–5 years For the magnetic imaging equipment at new private clinics, the Group adopted a units-of-production based depreciation method effective from 1 January 2018. The amount of depreciation is based on the units of production derived from the equipment. For the Group’s other machinery and equipment, the Group still uses straight-line depreciation. As the utilisation rate of imaging capacity is low during the first years of a new operating location, the units-of-production method provides a more accurate reflection of the actual economic use of the magnetic imaging equipment in question. For intangible assets with finite economic useful lives, the amortisation periods are as follows: Trademarks 10 years Development costs 3–10 years Customer agreements 4 years Patient database 4 years Non-competition agreements 2–5 years Other intangible assets 3–7 years Property, plant and equipment is depreciated on a straight-line basis over the shorter of economic useful life or lease term. The planned depreciation periods of property, plant and equipment are as follows: Right-of-use plots 25 years Right-of-use buildings and business premises 1–15 years Right-of-use equipment 3–10 years Impairment is recognised pursuant to IAS 36 for onerous right-of-use buildings and business premises. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 45 Depreciation, amortisation and impairment by asset type 2022 2021 Intangible assets Trademarks -1,040 -776 Capitalised development costs -930 -961 Customer relationship value -1,233 -1,622 Non-competition agreements -60 -355 Patient database -378 -232 Other intangible assets -4,036 -2,752 -7,677 -6,699 Property, plant and equipment Buildings -104 -96 Renovation expenses on real estate -2,217 -2,463 Machinery and equipment -8,327 -6,604 Other tangible assets -1 -1 -10,649 -9,163 Right-of-use assets Right-of-use plots -97 -91 Right-of-use buildings and business premises -26,178 -17,885 Right-of-use equipment -898 -863 -27,173 -18,840 Total depreciation, amortisation and impairment -45,498 -34,701 8. Financial income EUR 1,000 2022 2021 Dividend income from financial assets measured at fair value through profit or loss 7 7 Interest income from loans and receivables 533 118 Interest income from financial lease receivables 135 83 Other financial income 46 35 Total 721 242 9. Financial expenses EUR 1,000 2022 2021 Interest expenses from financial liabilities carried at amortised cost -3,392 -1,726 Interest expenses on lease liabilities -3,439 -1,706 Other financial expenses -1,243 -524 Total -8,074 -3,956 Pihlajalinna rearranged its long-term debt financing with a sustainability-linked financing arrangement in March 2022 which is described in more detail in Note 22 Financial liabilities and Note 25 Financial risk man- agement . Acquisitions and investments in connection with the opening of new units as well as renovations of existing units have increased Pihlajalinna’s indebtedness and thus interest costs. The acquisition of Pohjola Hospital increased the interest expenses of Pihlajalinna’s lease liabilities by EUR 1.8 million. The financing rearrangement and the waiver costs paid at the end of the year due to the increase in the temporary covenant levels caused a total of EUR 0.7 million in one-time financing costs. 10. Income taxes Accounting policies The income taxes on the consolidated income statement consist of current tax, adjustments to taxes for previous periods, and deferred taxes. Taxes are recognised in profit or loss, except when they are directly attributable to items recognised under equity or other comprehensive income. In such cases, also the tax is recognised under the item in question. Current tax is calculated on taxable profit, based on the enacted tax rate. Tax is adjusted with any taxes associated with prior financial years. Any penal interests related to said taxes are recognised under financial expenses. The share of associates’ profit is presented in the statement of comprehensive income as calculated from net profit and thus including the income tax charge. EUR 1,000 2022 2021 Current taxes -1,931 -5,291 Taxes for the previous financial years -37 2 Deferred taxes 8,078 159 Total 6,110 -5,130 The change in deferred taxes for the year 2022 is related to de- ferred tax assets recorded from confirmed losses, which are de- scribed in more detail in note 19 Deferred tax assets and liabili- ties. . REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 46 Reconciliation of effective tax rate EUR 1,000 2022 2021 Profit before taxes 1,550 24,222 Taxes calculated on the basis of the Finnish tax rate (20%) -310 -4,844 Income not subject to tax 2 2 Non-deductible expenses -309 -284 Unrecorded deferred tax assets from tax losses -70 -635 Recorded deferred tax assets from tax losses 6,381 Utilised prior losses with unrecognised tax benefits 333 495 Share of associated company’s profit -3 -2 Share-based remuneration -13 24 Other items 137 112 Taxes for prior financial years -37 2 Taxes in the income statement 6,110 -5,131 Effective tax rate -21.2 % 11. Earnings per share Accounting policies Earnings per share is calculated by dividing the profit for the financial year attributable to owners of the par- ent by the weighted average number of shares outstanding during the financial year. Earnings per share for the financial year attributable to owners of the parent are calculated by dividing the profit for the financial year attributable to owners of the parent by the weighted average number of shares outstanding during the financial year. When calculating diluted earnings per share, the average number of shares is adjusted by the dilution ef- fect of the share-based incentive scheme. EUR 1,000 2022 2021 Profit for the financial year attributable to owners of the parent, EUR 9,518,830.97 20,094,607.63 Number of shares outstanding, weighted average 22,560,271 22,589,383 Basic earnings per share (EPS), EUR/share 0.42 0.89 Diluted earnings per share, EUR/share 0.42 0.89 12. Property, plant and equipment Accounting policies Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures incurred directly from the acquisition of an item of property, plant and equip- ment. Costs incurred subsequently are included in the carrying amount of an asset only if it is deemed prob- able that any future economic benefits related to the asset will flow to the Group and that the cost of the asset can be reliably determined. Other repair and maintenance costs will be expensed at the time they are incurred. The residual value, the useful life of an asset and the depreciation method applied are reviewed at least at the end of each financial year and adjusted as necessary to reflect the changes in the expectations con- cerning the economic benefits attached to the asset. Capital gains generated from decommissioning and disposing of property, plant and equipment are included under other operating income, and capital losses are included under other operating expenses. Assets are depreciated from the time when they are ready for use; i.e. when their location and condition allow them to be applied as intended by the management. In 2018, the Group opened private clinics in Turku, Oulu and Seinäjoki. The Group acquired 3 Tesla high- field magnetic imaging equipment for the clinics in Oulu and Turku and a 1.5 Tesla high-field magnetic imag- ing device for the clinic in Seinäjoki. For the magnetic imaging equipment at these green field private clinics, the Group adopted a units-of-production based depreciation method effective from 1 January 2018. The amount of depreciation is based on the units of production derived from the magnetic imaging equipment. The same depreciation method is also applied for Pohjola Sairaala’s 3 Tesla high field magnetic imaging equipment in Helsinki, Tampere, Turku, Oulu and Kuopio. For the Group’s other machinery and equipment, the Group still uses straight-line depreciation. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 47 Property, plant and equipment EUR 1,000 Land areas Buildings Renovation expenses on real estate Shares in real estate companies Machinery and equipment Other tangible assets Construction in progress Total Cost at 1 January 2022 36 3,026 30,549 5,572 63,496 172 1,344 104,195 Additions 0 3 482 0 15,972 2 8,316 24,774 Business combinations 0 0 131 1,272 0 0 1,403 Transfers between items 0 0 4,384 0 157 0 -4,414 127 Reclassifications to assets held for sale 0 0 -1,282 -100 -5,072 -7 0 -6,461 Disposals 0 0 0 0 -484 0 0 -484 Cost at 31 December 2022 36 3,029 34,263 5,472 75,341 167 5,246 123,554 Accumulated depreciation at 1 January 2022 -505 -19,131 0 -39,560 -10 0 -59,206 Depreciation and amortisation -104 -2,217 0 -8,327 -1 0 -10,649 Transfers between items 98 -10 0 -124 0 0 -37 Reclassifications 0 807 0 4,070 0 0 4,877 Disposals 0 0 0 197 0 0 197 Accumulated depreciation at 31 December 2022 -511 -20,552 0 -43,743 -11 0 -64,817 Carrying amount at 1 January 2022 36 2,521 11,417 5,572 23,936 162 1,344 44,987 Carrying amount at 31 December 2022 36 2,518 13,711 5,472 31,598 155 5,246 58,737 EUR 1,000 Land areas Buildings Renovation expenses on real estate Shares in real estate companies Machinery and equipment Other tangible assets Construction in progress Total Cost at 1 January 2021 36 2,937 29,370 5,572 55,584 172 539 94,209 Additions 0 0 792 0 8,337 0 1,793 10,921 Business combinations 0 0 4 39 0 0 43 Transfers between items 0 89 384 0 101 0 -785 -212 Disposals 0 0 0 0 -564 0 -202 -766 Cost at 31 December 2021 36 3,026 30,549 5,572 63,496 172 1,344 104,195 Accumulated depreciation at 1 January 2021 -410 -16,665 0 -33,130 -7 0 -50,212 Depreciation and amortisation -96 -2,463 0 -6,604 -1 0 -9,163 Transfers between items 0 -3 0 -112 -3 0 -118 Disposals 0 0 0 286 0 0 286 Accumulated depreciation at 31 December 2021 -505 -19,131 0 -39,560 -10 0 -59,206 Carrying amount at 1 January 2021 36 2,527 12,703 5,572 22,454 165 539 43,996 Carrying amount at 31 December 2021 36 2,521 11,417 5,572 23,936 162 1,344 44,987 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 48 13. Intangible assets and goodwill Accounting policies Goodwill Goodwill generated through business combinations is measured at the amount by which the consideration transferred, non-controlling interests in the acquiree and previously owned holding combined exceed the fair value of the identifiable acquired net assets. Goodwill typically reflects the value of acquired market share, business expertise and synergies. Goodwill is not amortised, but it is tested for impairment annually and whenever there is an indication that the asset may be impaired. Goodwill is allocated to cash-generating units (CGUs). Goodwill is measured at original cost less accumulated impairment. Cloud computing arrangement Accounting treatment of cloud service arrangements depends on whether the cloud-based software is clas- sified as an intangible asset or a service contract. The arrangements in which the the Group has no authority on the software are accounted as service agreements which entitle the Group to utilize the cloud service provider's application software during the contract period. Application software license fees and related configuration or customization costs are recognized (for example, in other operating expenses) when the services are received. Prepayments to the cloud service provider for software customization that are not separable are recognized as an expense during the contract period. Capitalised development costs Assets are amortised from the time when they are ready for use. Assets that are not yet available for use are tested annually for impairment. Subsequent to their initial recognition, capitalised development costs are measured at cost less accumulated amortisation and impairment. The amortisation period for development costs is 3 to 10 years, during which capitalised development costs are amortised using the straight-line method. The Group’s capitalised development costs that have not been amortised are associated with the following projects: ● New operating model for fixed-price occupational healthcare agreements and a related occupational healthcare portal ● Renewal of primary care service models, involving remote service models for municipal residents and mobile solutions (social and healthcare service centre concept) ● Pihlajalinna mobile application and website development with the aim of making AI-assisted digital services available to all customers. ● Specialised care referral forwarding and coordination operating model developed for the Parkano so- cial and healthcare partnership area ● Takeover of social and healthcare services in Mänttä-Vilppula and the development of operating models ● The three-year SYKKI project, funded with Tekes subsidies, aimed at creating an effective and cost- efficient model for public social and healthcare services REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 49 Intangible assets 1000 € Goodwill Trademarks Development costs Customer relationship value Non- competition agreements Patient dadabase Other intangible assets Other long-term expenditures Pre-pay- ments Total Cost at 1 January 2022 188,909 7,762 6,368 10,572 7,507 5,677 6,894 13,543 715 247,948 Additions 0 0 18 0 0 0 547 6,224 663 7,451 Business combinations 65,127 3,148 0 2,040 281 2,159 59 496 0 73,310 Reclassifications to assets held for sale -3,004 0 0 0 0 -13 -6 0 -3,023 Transfers between items 0 0 0 0 0 0 7 897 -896 8 Cost at 31 December 2022 251,032 10,910 6,386 12,612 7,788 7,836 7,494 21,153 482 325,695 Accumulated depreciation at 1 January 2022 -6,255 -4,019 -8,515 -7,497 -5,642 -6,096 -6,149 0 -44,174 Depreciation and amortisation -1,040 -930 -1,233 -60 -378 -533 -3,503 0 -7,677 Transfers between items 0 0 0 0 0 -8 -1 0 -9 Accumulated depreciation at 31 December 2022 -7,295 -4,949 -9,748 -7,557 -6,020 -6,637 -9,654 0 -51,860 Carrying amount at 1 January 2022 188,909 1,508 2,349 2,057 10 35 798 7,394 715 203,775 Carrying amount at 31 December 2022 251,032 3,615 1,436 2,864 231 1,816 857 11,500 482 273,834 1000 € Goodwill Trademarks Development costs Customer relationship value Non- competition agreements Patient dadabase Other intangible assets Other long-term expenditures Pre-pay- ments Total Cost at 1 January 2021 173,607 7,762 6,348 8,397 7,507 5,677 6,605 10,404 47 226,355 Additions 0 0 21 0 0 0 232 2,773 985 4,011 Business combinations 15,301 0 0 2,175 0 0 9 8 17,493 Transfers between items 0 0 0 0 0 0 48 358 -316 89 Cost at 31 December 2021 188,909 7,762 6,368 10,572 7,507 5,677 6,894 13,543 715 247,948 Accumulated depreciation at 1 January 2021 -5,479 -3,057 -6,893 -7,142 -5,411 -5,511 -3,919 -37,411 Depreciation and amortisation -776 -961 -1,622 -355 -232 -538 -2,215 -6,699 Transfers between items 0 0 0 0 0 -48 -16 -64 Accumulated depreciation at 31 December 2021 -6,255 -4,019 -8,515 -7,497 -5,642 -6,096 -6,149 -44,174 Carrying amount at 1 January 2021 173,607 2,284 3,290 1,505 365 267 1,095 6,483 47 188,944 Carrying amount at 31 December 2021 188,909 1,508 2,349 2,057 10 35 798 7,394 715 203,775 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 50 Impairment testing of goodwill Accounting policies Goodwill generated in M&A transactions is allocated to cash-generating units (CGU). Under Pihlajalinna’s operating structure, the Group’s CEO, with the help of the Chief Operating Officers and the other members of the Management Team, is responsible for the Group’s business operations and service offering to both the private and public sectors. The Chief Operating Officers prepare budgets for the Group’s businesses with the help of regional directors and the managing directors of the municipal companies. The Group CEO is re- sponsible for the resources, investments and profitability of the Group’s businesses. Pihlajalinna’s cash-gen- erating unit corresponds to the reporting segment, i.e. the Group. The recoverable amount is determined by value-in-use calculations. Cash flow-based value-in-use is de- termined by calculating the discounted present value of expected cash flows. The discount rate used in the calculations is determined using the weighted average cost of capital (WACC), which describes the total cost of equity and liabilities, taking into account the time value of money and the specific risks associated with Pihlajalinna’s business. The discount rate is a pre-tax rate. The risk-free interest rate, risk multiplier (beta) and the additional risk premium and market risk premium parameters used in determining the discount rate are based on information obtained from the market. Cash flow estimates have been validated by comparing them to Pihlajalinna’s market capitalisation. Potential impairment loss on goodwill is recognised immediately in the income statement. Previously rec- ognised impairment losses on goodwill are not reversed. The Group carried out its annual impairment testing of goodwill based on the situation on 30 November 2022 (30 November 2021) using the carrying amounts on the date in question and calculations of future amounts. The result of the testing was that no impairment losses were recognised for the Group’s cash-gen- erating unit, i.e. the Group as a whole, for the financial year that ended on 31 December 2022. The Group’s recoverable amount exceeded the carrying amount by approximately EUR 223 (218) million. In early 2023, the Group announced it will sell its dental care services. The assets related to the business functions in question have been treated as assets held for sale in accordance with IFRS 5. The forecasts used in the calculations have included the future cash flows of the assets held for sale, but the future cash flows of these assets have been estimated close to zero and goodwill associated with the assets is included in the impairment testing. Goodwill related to the assets in question is presented separately from the Group’s other goodwill on 31 December 2022 in accordance with IFRS 5. Goodwill: EUR 1,000 2022 2021 Tested goodwill in total, Group 254,264 188,909 Goodwill related to current assets held for sale -3,004 Changes that have occurred after testing in the preliminary purchase price allocations for the acquired businesses -228 Goodwill as per the statement of financial position at the end of the fi- nancial year 251,032 188,909 During the year, goodwill has increased due to acquired business operations. The acquired business opera- tions have been specified in more detail in Note 26 Acquired business operations. Assumptions used in the calculation of utility value for each testing period: Impairment testing of goodwill 2022 2021 Turnover growth, first three years, approximately 5.30% 2.80% EBIT margin, first three years, approximately 6.90% 5.60% Discount rate (pre tax WACC) 8.70% 7.68% Discount rate (after tax WACC) 7.25% 6.36% Forecast period (years) 10 5 Terminal growth rate after the forecast period (5 years) 2.00% 1.30% The terminal period’s share of the amount of expected cash flows 46% 73% Key accounting estimates and decisions based on management judgement In impairment testing, the recoverable amounts are determined on the basis of value-in-use. The cash flow forecasts used in the value-in-use calculations in impairment testing are based on cash flow forecasts pre- pared by the management and approved by the Board of Directors. For the impairment testing carried out in 2022, the cash flow forecasts cover a 10-year period and the terminal period. The management’s view is that using a 10-year forecast period is justified because the Group has significant long-term and fixed-term complete social and healthcare outsourcing agreements. According to the assessment of the company’s management, its fixed-term service agreements will remain in effect, as agreed, with the wellbeing services counties until the end of the term for each agreement. These agreements will expire during the 10-year forecast period, which is why management’s view is that extending the forecast period provides a more accurate picture of the company’s future cash flows. The ter- minal growth rate applied after the forecast period is two per cent, which corresponds to the long-term in- flation forecast for the Finnish economy. For the period 2023–2025, the management forecasts that revenue, operating profit and cash flows will increase in line with the Group’s long-term strategy. Thereafter, in the forecasts for 2026–2032, the Group has taken into account the impacts of the expiration of the complete outsourcing agreements in accordance with the agreement period of each agreement. The assumptions of the development of prices and costs used in the cash flow estimates are based on the management’s estimates of the development of demand and the markets, which are compared with exter- nal information sources. The productivity and efficiency assumptions used in the calculations are based on internal targets, with previous actual development taken into account in their estimation. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 51 Key assumptions defined by the management and used in the calculation in 2022: Assumption Description Projected revenue Determined on the basis of a forecast prepared by the manage- ment and approved by the Board of Directors, and the agreement periods of the complete outsourcing agreements. Projected operating profit Determined on the basis of a forecast prepared by the manage- ment and approved by the Board of Directors, and the agreement periods of the complete outsourcing agreements. Duration of the forecast period For testing carried out in 2022, the forecast period is 10 years plus the terminal period. Terminal growth rate assump- tion The terminal growth rate assumption is 2%. Discount rate Determined using the weighted average cost of capital (WACC), which describes the total cost of equity and liabilities, taking into account the time value of money and the specific risks associated with Pihlajalinna’s business. Uncertainty in forecasting has been taken into account in determining the additional risk premium. Sensitivity analyses in impairment testing Based on the testing calculations, there is no need to recognise impairment. The cash-generating unit’s re- coverable amount exceeded the carrying amount by approximately EUR 223 (218) million. The management has conducted sensitivity analyses of the key factors. The table below shows the required change in as- sumptions that would lead to the recoverable amount being equal to the carrying amount, provided that the assumptions change one at a time. Sensitivity analyses 2022 2021 Decline in EBIT margin more than 2 percentage units more than 2 percentage units Decline in volume more than 15 percentage units more than 21 percentage units Increase in discount rate more than 3 percentage units more than 4 percentage units Decline in the terminal growth rate more than 2 percentage units more than 2 percentage units The management has conducted a sensitivity analysis for 2022 also with a five-year forecast period plus the terminal period. Also based on testing under a five-year period, the cash-generating unit's recovera- ble amount exceeded the carrying amount. 14. Right-of-use assets Accounting policies Most of the Pihlajalinna rental arrangements in line with the IFRS 16 are leases for business premises. The other lease arrangements in line with the standard concern land areas, machinery and equipment (exercise equipment, clinical equipment, cars and other equipment). Pihlajalinna applies the IFRS 16 exemption that allows lessees to elect not to recognise a right-of-use asset and corresponding lease liability for assets with a lease term of 12 months or less as well as assets of low value. Assets of low value include, for example, IT equipment and office furniture. Furthermore, to make the accounting of leases easier, Pihlajalinna elects not to separate service components from leases, instead treating the entire agreement as a lease in its con- solidated financial statements. For lease arrangements valid until further notice, with a short notice period, Pihlajalinna will estimate the probable lease term. Right-of-use assets are measured at cost, which includes the following items: ● original amount of the lease liability ● direct expenses of the initial phase and ● expenses due to restoring to original condition Right-of-use assets are presented under property, plant and equipment and lease liabilities are presented under financial liabilities. The right-of-use asset is initially measured at cost and depreciated over the economic life of the asset. The right-of-use asset is also subject to IAS 36 Impairment of Assets. The lease liability is initially measured at the present value of future lease payments. In later periods, the lease liability is measured using the effective interest rate method, according to which the lease liability is measured at amortised cost and the interest expense is amortised over the lease term. The standard allows the lessee to also include non-lease elements of an agreement (typically services) in the lease liability. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 52 Right-of-use assets EUR 1,000 Right-of- use plots Right-of-use buildings and business premises Right-of-use equipment Total Cost at 1 January 2022 840 185,897 5,587 192,325 Additions 375 25,090 1,025 26,490 Business combinations 0 105,458 4 105,463 Transfers between items 0 138 -41 97 Disposals 0 -4,059 -368 -4,427 Cost at 31 December 2022 1,215 312,525 6,206 319,947 Accumulated depreciation at 1 January 2022 -484 -91,941 -4,314 -96,738 Depreciation and amortisation -97 -26,178 -898 -27,173 Transfers between items 0 16 16 Disposals 1,435 255 1,690 Accumulated depreciation at 31 De- cember 2022 -580 -116,684 -4,937 -122,201 Carrying amount at 1 January 2022 357 93,956 1,273 95,586 Carrying amount at 31 Dec 2022 635 195,841 1,270 197,746 EUR 1,000 Right-of- use plots Right-of-use buildings and business premises Right-of-use equipment Total Cost at 1 January 2021 756 176,820 5,350 182,926 Additions 84 8,917 805 9,807 Business combinations 0 2,802 0 2,802 Transfers between items 0 -670 -77 -747 Disposals 0 -1,972 -491 -2,463 Cost at 31 December 2021 840 185,897 5,587 192,325 Accumulated depreciation at 1 January 2021 -393 -75,838 -3,863 -80,094 Depreciation and amortisation -91 -17,885 -863 -18,840 Transfers between items 0 670 77 747 Disposals 1,112 336 1,448 Accumulated depreciation at 31 De- cember 2021 -484 -91,941 -4,314 -96,738 Carrying amount at 1 January 2021 363 100,981 1,487 102,832 Carrying amount at 31 Dec 2021 357 93,956 1,273 95,586 Short-term leases recognised in the income statement, totalling EUR 140 (115) thousand, and minor leases recognised in the income statement, totalling EUR 1,172 (734) thousand, are practical exemptions provided by IFRS 16 applied by the Group. Lease liabilities relating to right-of-use items are specified in Note 22 Financial liabilities . 15. Other non-current receivables Accounting policies Right-of-use assets that have been transferred to a lessee under a sublease and classified as financial leases have been derecognised from fixed assets and presented on the balance sheet as net investments in a sublease. EUR 1,000 2022 2021 Lease deposits paid 561 535 Non-current subleases 7,750 4,586 Other receivables 90 90 Total 8,402 5,211 Pihlajalinna subleased two care homes that it sold and leased back in May 2020. The table below presents the contractual maturity analysis of subleases. The figures are undiscounted and they include both future interest payments and repayments of the net investment. Maturity distribution of sublease receivables less than 1 year 1–2 years 2–3 years 3–4 years over 4 years Carrying amount at 31 Dec 2022 8,697 947 851 649 623 5,628 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 53 16. Trade and other receivables Accounting policies At the end of each reporting period, the Group assesses whether or not there is objective evidence of im- pairment regarding any individual financial asset. Objective evidence of impairment of loans and other re- ceivables includes significant financial distress of the debtor and payments being delinquent or substantially delayed. Impairment of loans is recognised in financial expenses in the income statement and impairment of other receivables is recognised in other operating expenses for the period in which the impairment was identified. The expected credit loss model is based on the amount of historical credit losses. The lifetime expected credit losses are calculated by multiplying the gross carrying amount of unpaid trade receivables by the ex- pected loss. Key accounting estimates and decisions based on management judgement Determining the annual profitability of the Group’s fixed-term complete social and healthcare services out- sourcing agreements may become accurate with a delay. The Group may not always be aware of the actual costs of the agreements at the time of preparing the financial statements, and the agreements may involve variable elements of compensation. The cost accumulation of public specialised care involves random fluc- tuation. In addition, individual cases falling within the scope of the hospital districts’ pooling system for high-cost care may influence the cost liability of specialised care considerably during the financial year, and between financial periods, in Pihlajalinna’s municipal companies. The fixed-term service agreements for all of the Group’s complete outsourcing arrangements are highly similar with regard to their principles and basic terms. Pihlajalinna has calculated and recognised the varia- ble compensation components and cost compensation under the agreements using the same criteria and model for all clients. Demands for the compensation of cost increases due to changes in services corre- sponding to the actual costs and investment costs that serve operations after the end of the term of the contract being the client’s responsibility constitute the majority of costs and variable compensation compo- nents that are specified with a delay. For 2022, the assessment of investment costs and COVID-19 related costs included in invoicing by hospital districts can only be carried out after the hospital districts have pub- lished their financial statements. Pihlajalinna has recognised only part of these legally justified claims in its income statement. The parties to the agreements are bound by an obligation to negotiate and negotiation is the primary procedure. If the obligation to negotiate does not lead to payment, the receivables are sought through legal action, which may further delay the collection of items presented in current receivables in the financial statements. The estimated items included in receivables are described in more detail in Note 1 Revenue from contracts with customers under Items that may, according to the management’s estimate, influence the profitability of complete outsourcing agreements with a delay . EUR 1,000 2022 2021 Trade receivables 54,568 78,455 Prepayments and accrued income 20,102 12,608 Current subleases 947 601 Other receivables 1,189 479 Total 76,806 92,143 Contract assets are described in more detail in connection with Note 1 Revenue from contracts with custom- ers and are included in the table above in prepayments and accrued income. The carrying amount of trade receivables and other receivables corresponds to the maximum credit risk involved at the end of the reporting period. Pihlajalinna regularly reviews the credit risk of its receivables and the procedures used to estimate the credit risk. No significant changes have been observed in customers’ payment behaviour. As described under Key accounting estimates and decisions based on management judgement , if the ne- gotiation obligation does not lead to payment, the receivables will be collected through legal action. This may further delay the collection of items presented in current receivables in the financial statements. The Group recognised EUR 0.4 (0.5) million in impairment losses on trade receivables during the financial year. The estimated impairment loss on contract assets is EUR 0.0 (0.0) million. Age distribution of trade receivables EUR 1,000 2022 Impairment losses Share of expected impairment losses Net 2022 Not due 33,342 -25 0.1 % 33,317 Less than 30 days 8,469 -10 0.1 % 8,459 30–60 days 1,515 -72 4.7 % 1,443 61–90 days 918 -152 16.6 % 766 More than 90 days 11,106 -522 4.7 % 10,584 Total 55,349 -781 54,568 EUR 1,000 2021 Impairment losses Share of expected impairment losses Net 2021 Not due 24,651 -8 0.0 % 24,643 Less than 30 days 4,152 -12 0.3 % 4,140 30–60 days 2,333 -67 2.9 % 2,266 61–90 days 1,965 -133 6.8 % 1,832 More than 90 days 46,053 -479 1.0 % 45,574 Total 79,153 -698 78,455 Key accounting estimates and the use of management judgement are discussed in Note 1 Revenue from con- tracts with customers . REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 54 The management of credit risks related to trade receivables is discussed in more detail in Note 25 Finan- cial risk management . EUR 1,000 2022 2021 Credit loss provision at 1 January 698 689 Credit losses recorded -781 -547 Change in credit loss provision 864 556 Credit loss provision at 31 December 781 698 Material items incl. in prepayments and accrued income EUR 1,000 2022 2021 Personnel expenses 1,843 1,876 Expenses paid in advance 6,528 3,061 Hedging, interest rate swap 5,113 0 Contract assets 6,052 6,661 Other 566 1,009 20,102 12,608 The carrying amounts of the receivables correspond materially to their fair values. 17. Provisions Accounting policies A provision is recognised when the Group has a legal or constructive obligation resulting from a past event, when it is probable that the payment obligation will materialise and when the amount of the obligation can be reliably estimated. The amount recognised as a provision equals the best estimate of the costs required to fulfil the present obligation on the date of the financial statements. A restructuring provision is recognised when the Group has in place a detailed plan for such restructuring and its implementation has commenced or the interested parties have been informed of the main points of such a plan. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable expenses of meeting the obligations under the contract. EUR 1,000 2022 2021 Current provisions 0 71 Non-current provisions 89 134 Total 89 205 - Onerous contracts Restructuring provision Total EUR 1,000 1.1.2021 762 762 Increases in provisions 20 300 320 Provisions used -645 -232 -877 Reversals of unused provisions 31.12.2021 137 68 205 Increases in provisions Provisions used -48 -68 -116 Reversals of unused provisions 0 31.12.2022 89 0 89 18. Trade and other payables EUR 1,000 2022 2021 Trade payables 41,673 52,571 Accrued liabilities 78,267 65,915 Pre-payments 33 938 Other liabilities 7,556 5,683 Total 127,529 125,107 Material items included under Accrued liabilities: Wages and salaries and social security payments 43,846 42,425 Doctor’s fee liability 15,376 8,261 Allocation of sales 0 18 Allocation of purchase invoices 10,261 11,057 Current liabilities held for sale 3,237 0 Financial items 212 65 Other accrued liabilities 5,334 4,087 Total 78,267 65,915 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 55 19. Deferred tax assets and liabilities Accounting policies Deferred taxes are calculated on temporary differences between the carrying amount and the tax base. However, a deferred tax liability shall not be recognised on the initial recognition of goodwill, or on the ini- tial recognition of an asset or liability in a transaction which is a business combination and, at the time of transaction, affects neither accounting profit nor taxable profit. In the Group, the most significant temporary differences result from depreciation and amortisation of property, plant and equipment and intangible assets, fair value-based adjustments made in connection with business combinations, and unused tax losses. Deferred taxes are calculated by applying tax rates enacted or substantively enacted by the end of the reporting period. A deferred tax asset is only recognised to the extent that it is probable that taxable profit will be available against which the temporary difference can be utilised. However, a deferred tax asset is not recognised if it 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 accounting profit nor taxable profit. Whether or not de- ferred tax assets can be recognised in this respect is always estimated at the end of each reporting period. The Group shall offset deferred tax assets and liabilities where these relate to the same taxation authority and the same taxable entity. Key accounting estimates and decisions based on management’s judgement The management uses judgement when determining the deferred assets to be recorded in respect of tax losses confirmed in the Group. On 31 December 2022, the Group recorded more deferred tax assets arising from unused confirmed tax losses. The most significant deferred tax assets from confirmed unused losses have been recorded for Pihlajalinna Omasairaala Oy (approximately EUR 5 million), Pihlajalinna Oyj (approx- imately EUR 1.1 million) and Pihlajalinna Oulu Oy (approximately EUR 1 million). Deferred tax assets have been recorded up to the amount that, according to the management’s assess- ment, it is probable that taxable income will be generated in the future, against which the unused tax losses can be utilized. Estimates are based on forecasts made by management and how profitability develops in different companies. Actual results may differ materially from the estimates made at the time of preparing the financial statements. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 56 Changes in deferred taxes during 2022: Recognised in profit and loss Recognised in the statement of compre- hensive income Deferred tax assets (EUR 1,000) 1 January 2022 Business combinations Reclassification to as- sets held for sale 31 December 2022 Tax losses carried forward confirmed by tax authorities 2,547 9,314 11,860 Sales proceeds from sale and leaseback arrangements 223 -30 193 Provisions 293 -65 227 Share-based incentive scheme 60 -55 5 Reclassification to assets held for sale -63 -63 IAS 37, contingent assets 749 -749 0 Effect of IFRS 16 774 518 1,291 Cloud computing arrangements 255 -27 228 Other items 584 -767 3,766 3,583 Deferred tax liabilities on the statement of financial position 5,484 8,138 3,766 -63 17,324 Deferred tax liabilities Property, plant and equipment and intangible assets 4,803 520 22 5,344 Recognition of property, plant and equipment and intangible assets at fair value in busi- ness combinations 722 -542 1,526 1,705 Fair value hedging 1,023 1,023 Effect of IFRS 16 337 4 0 341 Other items 22 77 0 99 Deferred tax liabilities on the statement of financial position 5,884 58 1,023 1,547 8,512 Changes in deferred taxes during 2021: Tax losses carried forward confirmed by tax authorities 2,438 108 0 2,547 Sales proceeds from sale and leaseback arrangements 253 -30 0 223 Provisions 590 -297 0 293 Share-based incentive scheme 122 -62 0 60 IAS 37, contingent assets 527 223 0 749 Effect of IFRS 16 715 58 0 774 Cloud computing arrangements 200 55 255 Other items 710 -209 83 584 Deferred tax liabilities on the statement of financial position 5,555 -154 83 5,484 Deferred tax liabilities Property, plant and equipment and intangible assets 4,498 304 0 4,803 Recognition of property, plant and equipment and intangible assets at fair value in busi- ness combinations 884 -597 435 722 Effect of IFRS 16 337 0 0 337 Other items 42 -19 0 22 Deferred tax liabilities on the statement of financial position 5,761 -312 435 5,884 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 57 - Maturing within five years 2022 2021 2022 2021 2022 2021 Maturing within five years 9,178 1,944 1,843 2,547 16 2,225 Maturing later than within five years 53,139 21,916 10,017 587 Total 62,317 23,860 11,860 2,547 603 2,225 Taxes calculated on the basis of the Finnish tax rate (20%) 12,463 4,772 20. Financial assets and liabilities by measurement category Accounting policies When a financial asset or liability is recognised on the transaction date, the Group measures it at its acquisi- tion cost, which is equal to the fair value of the consideration give or received. Financial assets For the purpose of measurement after initial recognition, the Group’s financial assets are classified as finan- cial assets measured at amortised cost and financial assets measured at fair value through profit or loss. The Group has no financial instruments classified as derivatives nor financial assets measured at fair value through other comprehensive income. Financial assets are derecognised when the Group has lost its con- tractual right for the financial assets in question or has transferred substantially all risks and rewards out- side the Group. The Group’s trade receivables, loan receivables, lease deposits and cash and cash equivalents have been classified as financial assets measured at amortised cost using the effective interest method, taking any im- pairment into account. Financial assets measured at fair value through profit or loss consist of quoted and unquoted shares. The Group has no holdings of shares quoted in public markets. Derivative contracts are entered in the balance sheet at fair value on the trade date and subsequently remeasured at their fair value on the balance sheet date. Derivatives that do not meet the conditions of hedge accounting are recorded in the income statement. The change in fair value is recorded in equity in fair value reserve if the derivative contract meets the conditions of cash flow hedging. If hedge accounting is not applied derivatives are revalued to fair value at the end of the reporting period and the profit or loss dif- ference arising from the valuation is recorded in the income statement. Cash and cash equivalents Cash and cash equivalents consist of cash at hand and demand deposits. The account with credit limit in use is included in current financial liabilities. Financial liabilities The Group classifies loans from financial institutions, accounts with credit limits, lease liabilities, trade paya- bles and other liabilities as financial liabilities measured at amortised cost using the effective interest method. Transaction costs are included in the initial carrying amount. Arrangement fees for loan commit- ments are treated as transaction costs. The Group classifies contingent considerations arising from M&A transactions as financial liabilities measured at fair value through profit or loss. No interest is paid on liabili- ties arising from contingent considerations. Any contingent consideration is measured at fair value at the date of acquisition and classified as a liability. A contingent consideration classified as a liability is measured at fair value at the end of each reporting period, and any resulting gain or loss is recognised in profit or loss after the end of the measurement period. The valuation principles of derivatives are discussed above in the section Financial assets . Financial liabilities are classified as current liabilities, unless the Group has an unconditional right to postpone their repayment to a date that is at least 12 months subsequent to the end of the reporting period. EUR 1,000 Note Fair value hierarchy Fair value through profit or loss Fair value - hedging instrument Amortised cost Total carrying amounts Fair values total 31 Dec 2022 Carrying amounts of financial assets Non-current financial assets Other shares and participa- tions level 3 1,167 1,167 1,167 Lease deposits 15 level 2 561 561 561 Other receivables 15 level 2 90 90 90 Current financial assets Trade receivables 16 54,568 54,568 54,568 Other receivables 16 level 2 1,189 1,189 1,189 Interest derivatives level 2 5,113 5,113 5,113 Cash and cash equivalents 13,128 13,128 13,128 Total 1,167 5,113 69,536 75,816 75,816 Carrying amounts of financial liabilities Non-current financial liabilities Loans from financial institu- tions 22 level 2 167,255 167,255 167,255 Lease liabilities 22 level 2 201,235 201,235 201,235 Other liabilities 22 level 2 573 573 573 Contingent considerations level 3 203 203 203 Current financial liabilities REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 58 Loans from financial institu- tions 22 level 2 1,386 1,386 1,386 Cheque account with credit limit 22 Contingent considerations level 3 1,704 1,704 1,704 Lease liabilities 22 level 2 28,338 28,338 28,338 Trade and other payables 18 41,673 41,673 41,673 Total 1,907 440,459 442,367 442,367 Note Fair value hierarchy Fair value through profit or loss Fair value - hedging instrument Amortised cost Total carrying amounts Fair values total 31 Dec 2021 Carrying amounts of financial assets Non-current financial assets Other shares and participa- tions level 3 1,476 1,476 1,476 Lease deposits 15 level 2 535 535 535 Other receivables 15 level 2 90 90 90 Current financial assets Trade receivables 16 78,455 78,455 78,455 Other receivables 16 level 2 479 479 479 Cash and cash equivalents 4,257 4,257 4,257 Total 1,476 83,816 85,291 85,291 Carrying amounts of financial liabilities Non-current fin. liabilities Loans from financial institu- tions 22 level 2 90,838 90,838 90,838 Lease liabilities 22 level 2 87,857 87,857 87,857 Other liabilities 22 level 2 607 607 607 Current financial liabilities Loans from financial institu- tions 22 level 2 1,283 1,283 1,283 Cheque account with credit limit 22 Lease liabilities 22 level 2 18,392 18,392 18,392 Trade and other payables 18 52,571 52,571 52,571 Total 251,548 251,548 251,548 Fair value assessment Financial assets and liabilities recognised at fair value on the consolidated statement of financial position are classified according to their valuation-based hierarchy levels and measurement methods as follows: Fair value hierarchy levels Level 1: Fair values are based on quoted prices in active markets for identical assets and liabilities. The Group has no financial assets or liabilities measured according to level 1 of the hierarchy. Level 2: The fair value is determined using valuation methods. The financial assets and liabilities are not sub- ject to trading in active and liquid markets. The fair values can be determined based on quoted market prices and deduced valuation. The carrying amount of the trade receivables and financial assets essentially corresponds to their fair value, as the effect of discounting is not significant taking the maturity of the re- ceivables into consideration. The fair values of lease liabilities are based on discounted cash flows. The fair values of loans essentially correspond to their carrying amount since they have a floating interest rate and the Group’s risk premium has not materially changed. The carrying amount of other financial liabilities es- sentially corresponds to their fair value, as the effect of discounting is not significant taking the maturity of the receivables into consideration. Derivative financial instruments are initially recognized at fair value on the trade date and are subsequently remeasured at their fair value on the balance sheet date. Level 3: The fair value is not based on verifiable market information, and information on other circum- stances affecting the value of the financial asset or liability is not available or verifiable. The Group’s other shares and participations consist solely of shares in unlisted companies. 21. Notes on equity Accounting policies The Group classifies all instruments it issues either as an equity instrument or a financial liability, depending on their nature. Equity instruments are any contracts evidencing a residual interest in the assets of the com- pany after deducting all of its liabilities. Costs relating to the issue or purchase of equity instruments are presented as a deduction from equity. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 59 Reconciliation of the number of shares EUR 1,000 Number of shares Share capital Reserve for in- vested unre- stricted equity Total Shares, total, 1 January 2021 22,620,135 80 116,520 116,600 Treasury shares held by the parent company on 31 December 2021 25,900 Outstanding shares on 31 December 2021 22,594,235 80 116,520 116,600 Shares, total, 1 January 2022 22,620,135 80 116,520 116,600 Treasury shares held by the parent company on 31 December 2022 70,491 Outstanding shares on 31 December 2022 22,549,644 80 116,520 116,600 Pihlajalinna has one share series, with each share entitling its holder to one vote at a General Meeting of shareholders. The company’s shares have no nominal value. All shares bestow their holders with equal rights to dividends and other distribution of the company’s assets. The shares belong to the book-entry sys- tem. Reserve for invested unrestricted equity The reserve for invested unrestricted equity contains other equity-like investments and the share subscrip- tion price to the extent that this is not entered in share capital under a specific decision. Fair value reserve The fair value reserve includes the effective portion of the change in the fair value of derivatives for which cash flow hedge accounting is applied. Distributable funds The parent company’s total distributable funds amount to EUR 210,975,765.50, of which the result for the financial year accounts for EUR -4,503,903.60. Dividends The Board of Directors proposes that no dividends be paid for the financial year that ended on 31 December 2022. 22. Financial liabilities EUR 1,000 2022 2021 Non-current interest-bearing liabilities Loans from financial institutions 167,255 90,838 Other liabilities 573 607 Lease liabilities 201,235 87,857 369,063 179,302 Current interest-bearing liabilities Loans from financial institutions 1,386 1,283 Lease liabilities 28,338 18,392 Yhteensä 29,723 19,675 Interest-bearing financial liabilities total 398,786 198,977 Pihlajalinna rearranged its long-term debt financing with a sustainability-linked financing arrangement on 22 March 2022. The EUR 200 million unsecured financing arrangement, for three years with an option for a further two years, was concluded with Danske Bank, OP Corporate Bank and Swedbank (the creditor banks). The financing comprises a long-term loan of EUR 130 million and a revolving credit facility of EUR 70 million for general financing needs and a acquisitions. It also includes an opportunity to later increase the total amount by EUR 100 million (to EUR 300 million), subject to separate decisions on a supplemen- tary loan from the funding providers. The covenants related to the new financing arrangement is dis- cussed in more detail in Note 25 Financial Risk Management. Drawdowns from the Group’s revolving credit facility are actually long-term by nature, although their maturity is 1, 3 or 6 months. Lease liabilities EUR 1,000 2022 2021 Non-current lease liabilities Right-of-use plots 546 305 Right-of-use buildings and business premises 200,092 86,963 Right-of-use equipment 597 588 201,235 87,857 Current lease liabilities Right-of-use plots 99 63 Right-of-use buildings and business premises 27,569 17,715 Right-of-use equipment 670 614 28,338 18,392 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 60 23. Changes in interest-bearing liabilities with no impact on cash flow EUR 1,000 2021 Cash flow Acquired busi- ness operations New instal- ments and lease liabilities Effective in- terest rate 2022 Non-current interest-bearing liabilities 91,445 75,221 438 606 -383 167,327 Current interest-bearing liabilities 1,283 0 27 576 0 1,887 Lease liabilities 106,248 -29,014 129,549 22,789 0 229,573 Total 198,977 46,208 130,015 23,970 -383 398,786 24. Capital management The goal of the Group’s capital management is to ensure that the normal requirements of business opera- tions are met, enable investments in line with the Group’s strategy and increase long-term shareholder value. The Group influences its capital structure mainly through the distribution of dividend and share is- sues. The key indicators concerning capital management are the equity ratio, the ratio of net debt to adjusted EBITDA and gearing. Loan covenants related to financing arrangement are described in more detail in the note 25 Financial risk management. EUR 1,000 Note 2022 2021 Equity 122,888 122,611 Total statement of fin. position – deferred revenue 661,606 456,127 Equity ratio 1) 18.6 % 26.8 % Interest-bearing financial liabilities 22 398,786 198,977 Cash and cash equivalents -13,128 -4,257 Interest-bearing net debt 385,659 194,720 Gearing 2) 313.8 % 158.8 % EBITDA 54,401 62,638 Adjustment items* 9,828 2,698 Adjusted EBITDA 64,229 65,336 Net debt/adjusted EBITDA 6.0 3.0 ** Significant transactions that are not part of the normal course of business, are related to business acquisition costs (IFRS 3), are infrequently occurring events or valuation items that do not affect cash flow are treated as adjustment items affecting comparability between review periods. According to Pihlajalinna’s definition, such items include, for example, restructuring measures, impairment of assets and the remeasurement of previous assets held by subsidiaries, the costs of closing down businesses and business locations, gains and losses on the sale of businesses, costs arising from operational restructuring and the integration of acquired businesses, costs related to the termination of employment relationships, as well as fines and corresponding compensation payments. Pihlajalinna also presents costs according to the IFRS Interpreta- tions Committee’s new Agenda Decision concerning cloud computing arrangements as adjustment items. EBITDA adjust- ments amounted to EUR 9.8 (2.7) million for the financial year that ended on 31 December 2022. ¹⁾ The formula for calculating the equity ratio is 100 x Equity / (Total statement of financial position – de- ferred revenue) ²⁾ The formula for calculating gearing is 100 x Interest-bearing net debt / Equity During the financial year, the Group has repurchased its own shares totalling 120,000 shares with an aver- age price of EUR 12.2896 per share. Pihlajalinna conveyed, in March, a total of 8,867 own shares to the key employees in accordance with the earlier incentive program (LTIP 2019). Pihlajalinna conveyed, in April, a total of 59,900 own shares as con-sideration in a transaction to redeem non-controlling interests of its sub- sidiary. Pihlajalinna conveyed, in May, a total of 6,642 own shares as part of the remuneration of the Board of Directors. On the financial statements date, the Group held 70,491 treasury shares. 25. Financial risk management The Group’s main financial risks consist of credit and counterparty risk as well as interest rate and liquidity risks. The Group operates in Finland and is therefore not exposed to material foreign exchange risks in its operations. The Group’s general risk management policies are approved by the Board of Directors. The Group’s Chief Financial Officer, together with the operative management, is responsible for identifying fi- nancial risks and for practical risk management. The goal of the Group’s risk management is to ensure suffi- cient liquidity, minimise financing costs and regularly inform the management about the Group’s financial position and risks. Group’s financial administration actively monitors compliance with the financial covenants and assesses financial leeway in relation to the covenant maximums as part of the Group’s business planning. Liquidity risk The Group monitors the amount of financing required by business operations by analysing cash flow fore- casts in order to make sure the Group has a sufficient amount of liquid assets for financing operations and repaying maturing loans. The Group aims to ensure the availability and flexibility of financing with adequate REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 61 credit limits, a balanced maturity profile and sufficiently long maturities for borrowings, as well as by ob- taining financing through several financial instruments. Monitoring and forecasting financial covenants in- cluded in the Company’s financing agreements is continuous. Pihlajalinna rearranged its long-term debt financing with a sustainability-linked financing arrangement on 22 March 2022. The EUR 200 million unsecured financing arrangement, for three years with an option for a further two years, was concluded with Danske Bank, OP Corporate Bank and Swedbank (the creditor banks). The financing comprises a long-term loan of EUR 130 million and a revolving credit facility of EUR 70 million for general financing needs and acquisitions. It also includes an opportunity to later increase the total amount by EUR 100 million (to EUR 300 million), subject to separate decisions on a supplementary loan from the funding providers. The Group has entered in March 2022 into interest rate swap agreement with a nominal value of EUR 65 million, which is used to convert the interest on a floating rate financing arrangement to a fixed rate. Cash flow hedge accounting is applied to the interest rate swap agreement, which means that the effective por- tion of the change in fair value is recognised in other comprehensive income. The interest rate swap is valid until 25 March 2027 and the interest rate swap fair value was EUR 5.1 million at the end of the financial year. The interest rate swap starting date is in March 2023. According to the interest rate swap the Group pays fixed 1,12 percent interest rate and receives variable interest 6 months Euribor rate. On the financial statements date, the Group’s cash and cash equivalents amounted to EUR 13.1 (4.3) mil- lion, in addition to which the Group had EUR 43.0 (45,0) million in unused committed credit limits available. In addition, EUR 100.0 (45.0) million of an additional credit limit, which is subject to a separate credit de- cision, was unused on the financial statements date. The Group’s equity ratio at the end of the financial year was 18.6 (26.9) per cent. Interest rate risk The Group is exposed to interest rate risk through its external financing arrangement. In accordance with the Group’s risk management principles, the Board of Directors decides on the need for, and extent of, in- terest rate hedging for the Group’s loan portfolio. The Group has entered into an interest rate swap agree- ment with a nominal value of EUR 65 million during the financial year, which is used to convert the interest on a floating rate financing arrangement to a fixed rate. The interest rate swap starting date is in March 2023. On the financial statements date, 58% (54%) of the interest-bearing liabilities were subject to fixed inter- est rates. During the financial year, the average annual interest rate on the Group’s interest-bearing liabili- ties including the interest rate swap agreement was approximately 3,20% (1.68%). The duration, i.e. the fixed interest rate period, of the financing portfolio was 3.7 (3.2) years. The table below presents the Group’s interest rate position at the end of the reporting period. EUR 1,000 2022 2021 Fixed rate financial liabilities 230,143 107,567 Financial liabilities subject to hedge accounting 65,000 0 Variable rate financial liabilities 104,136 91,521 Total variable rate position 104,136 91,521 The table below presents the effects on consolidated profit before tax should market interest rates rise or fall, all other things being equal. The sensitivity analysis is based on the interest rate position at the closing date of the reporting period. EUR 1,000 2022 2022 2021 2021 Change 1.0 percentage units higher 1.0 percentage units lower 1.0 percentage units higher 1.0 percentage units lower Effect on profit before tax -1,700 1,700 -915 0 Financial liabilities repayment schedule The table below presents the contractual maturity of financial liabilities. The figures are undiscounted and they include both future interest payments and repayments of principal. EUR 1,000 Carrying amount at 31 Dec 2022 less than 1 year 1–2 years 2–3 years 3–4 years over 4 years Loans from financial insti- tutions 168,641 -7,529 -5,810 -167,453 -4 Lease liabilities 229,573 -31,699 -29,751 -26,129 -21,944 -132,924 Other interest-bearing lia- bilities 573 -59 -57 -57 -57 -644 Contingent considerations 1,907 -1,710 -6 -6 -206 Trade payables 41,673 -41,673 Total 442,367 -82,671 -35,624 -193,645 -22,210 -133,568 EUR 1,000 Carrying amount at 31 Dec 2021 less than 1 year 1–2 years 2–3 years 3–4 years over 4 years Loans from financial insti- tutions 92,121 -2,958 -90,984 -265 Lease liabilities 106,248 -19,934 -16,175 -14,029 -11,942 -51,236 Other interest-bearing lia- bilities 607 -20 -57 -57 -57 -738 Trade payables 52,571 -52,571 Total 251,548 -75,483 -107,216 -14,351 -11,999 -51,974 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 62 Loan covenants The Group’s key loan covenants are reported to the financiers on a quarterly basis. If the Group breaches the loan covenant terms, the creditors may accelerate the repayment of the loans. The management moni- tors the fulfilment of loan covenant terms and reports on them to the Board of Directors on a regular basis. The financing arrangement includes the customary financial covenants concerning leverage (ratio of net debt to pro forma EBITDA) and gearing. IFRS 16 lease liabilities are not taken into account in the calculation of the covenants (Frozen GAAP). The loan margin of the financing is additionally linked to Pihlajalinna’s an- nual sustainability objectives related to patient satisfaction (NPS), employee engagement (eNPS) and access to surgical treatment within the target time. At the end of the financial year, the sustainability targets linked to the financing arrangement caused no changes in the loan margins. Due to the acquisition of Pohjola Hospital Ltd, Pihlajalinna and the creditor banks agreed on increasing the gearing covenant to 140 per cent and the leverage covenant to 4.00 for 2022. Pihlajalinna and the creditor banks agreed on a temporary adjustment to the covenants of the financing arrangement on two occasions in the latter part of the year. According to the acquired waivers, the lever- age covenant was set at 5.5 for the fourth quarter of 2022, 4.5 for the first quarter of 2023, and 4.0 for the second quarter of 2023. For the fourth quarter of 2022 and the first three quarters of 2023, gearing must not exceed 140 per cent. The financing arrangement’s original gearing covenant of 115 per cent will enter into effect in the review of the fourth quarter of 2023. Starting from the beginning of the third quarter of 2023, the leverage covenant according to the financing arrangement will be 3.75. At the end of the financial year, leverage in accordance with the financing arrangement stood at 5.23 and gearing was 139.95 per cent. Had the Group’s profit after taxes been lower by approximately EUR 40 thou- sand, the gearing covenant would have been breached. At the same time, however, the company’s interest rate swap had a fair value of EUR 5.1 million on the financial statements date. Had the interest rate swap been sold on the financial statements date, gearing would have fallen to 136.0 per cent and the leverage ratio would have fallen to 5.08. Breaching the covenants can lead to the financing arrangement falling due. Under the waiver agreement, the highest margin level of the financing arrangement increased to 1.0 per- cent units from the beginning of 2023 until the third quarter of the year. The increase to the highest margin level and the other waiver terms will be discontinued by the end of 2023. If the company proposes to re- main below the original covenant levels for the next 12 months, the waiver described above may be discon- tinued earlier. At the end of the reporting period, 31 December 2022, the loan amount to which the covenants apply was EUR 167.0 (90.0) million. Derivative financial instruments and hedge accounting Accounting policy The Group applies hedge accounting to reduce the future cash flow variation in profit due to the variation in interest rates. Derivative financial instruments are initially recognized at fair value on the trade date and are subsequently remeasured at their fair value on the balance sheet date. Derivative contracts are included in current assets or liabilities, except derivatives maturities greater than 12 months after the balance sheet date, which are classified as non-current assets or liabilities. The effective portion of the changes in the fair value of derivative financial instruments that are designated and qualified as cash flow hedges are recog- nized in the fair value reserve of equity. In cash flow hedges the critical terms in hedged item and hedging instruments are the same and hedge ratio is 1:1. When a hedging arrangement is entered into, the relationship between the hedged item and the hedging instrument, as well as the objectives of the Group's risk management are documented. The effec- tiveness of the hedge relationship is tested regularly and the effective portion is recognised, according to the nature of the hedged item, against the change in the fair value of the hedged item in the fair value re- serve of equity. The ineffective portion is recognized in the income statement either in operating profit or financial income and expenses. Hedge accounting is discontinued when the hedging instrument expires or is sold, or when the contract is terminated or exercised. Any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction has occurred. Deriatives used for hedging The Group has started to apply hedge accounting after entering in March 2022 into an interest swap to hedge a new floating rate financing arrangement. The Group has entered into an interest rate swap agree- ment with a nominal value of EUR 65 million during the financial year, which is used to convert the interest on a floating rate financing arrangement to a fixed rate. Cash flow hedge accounting is applied to the inter- est rate swap agreement, which means that the effective portion of the change in fair value is recognised in other comprehensive income. The interest rate swap is valid until 25 March 2027 and the interest rate swap fair value was EUR 5.1 million at the end of the financial year. The interest rate swap starting date is in March 2023. According to the interest rate swap the Group pays fixed 1,12 percent interest rate and re- ceives variable interest 6 months Euribor rate. Credit risk The Group’s credit risk mostly consists of credit risks involved in customer receivables related to business operations. The Group’s largest customers are municipalities, joint municipal authorities or large and sol- vent listed companies. The Group’s key credit risks are presented in Note 16 Trade and other receivables. The payment information of corporate and private customers is checked at every appointment. For the collection of payments, the Group uses an external collections agency. The Group offers private customers financing via SveaRahoitus. This arrangement includes a check of the customer’s creditworthiness. The age distribution of trade receivables is presented in Note 16 Trade and other receivables. The amount of credit losses recorded in profit or loss during the financial year was not significant. The maximum amount of the Group’s credit risk equals to the carrying amount of financial assets at the end of the financial year (see Note 20 Financial assets and liabilities by measurement category ). Currency risk The Group operates mainly in Finland and is not therefore exposed to material foreign exchange risks in its operations. The Group’s annual procurements in foreign currencies are insignificant. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 63 26. Acquired business operations Accounting policies When the Group acquires assets either through business arrangements or through other arrangements, the management evaluates the actual nature of the asset and the business when determining whether it is a business combination. When an asset or a group of assets does not form a business operation, the acquisition is not treated as a business combination and in that case the Group records the acquisition of individual assets and liabilities. The acquisition cost is allocated to individual assets and liabilities in proportion to their current values at the time of acquisition, and no goodwill is generated. Acquisitions defined as business aperations are treated as business combinations. The Group records business combinations using the acquisition method. The transferred consideration, including the contin- gent consideration and the identifiable assets and liabilities of the acquired company, are valued at fair value at the time of acquisition. Acquisition related expenses are recorded as expenses in the period in which they have incurred. The acquired business operations are consolidated to the financial statements from the moment the Group obtains control over the acquired business. The share of non-controlling inter- ests is recorded for each acquisition either at fair value or at an amount that corresponds to the relative share of the non-controlling interests in the net assets of the target of acquisition. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group presents these acquisitions as preliminary in its financial state- ments. Preliminary items are adjusted, and new assets and liabilities are recorded retrospectively, if new information is received that concerns the facts and circumstances that existed at the time of acquisition and which, if it had been known, would have affected the amounts recorded at that time. The measurement pe- riod may not exceed one year from the acquisition date. Key accounting estimates and decisions based on management’s judgement For acquired assets and liabilities, the fair values are determined according to the available market values. If market values are not available, the valuation is based on estimates of the asset’s ability to generate income and the purpose of use in Pihlajalinna’s business. Regarding the tangible assets, comparisons have been made with the market prices of similar assets and the decrease in value caused by the age, wear and tear and other similar factors of the purchased assets has been estimated. In particular, the valuation of intangible assets is based on the present values of future cash flows and requires management’s estimates of future cash flows and the use of assets. The fair value of the contingent consideration at the time of acquisition is recorded as part of the trans- ferred consideration. When the contingent consideration is classified as a financial liability, it is valued at fair value at the end of the reporting period, and the changes are recorded with an effect on profit. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 64 Acquired business operations, Pohjola Hospital Ltd Pihlajalinna acquired the entire share capital of Pohjola Hospital Ltd from Pohjola Insurance Ltd. The ac- quisition was completed on 1 February 2022. The purchase price allocation on the Pohjola Hospital acqui- sition has been finalized as of 31 January 2022. Adjustments have been made to the opening balance sheet of the Pohjola Hospital. Fair value adjustments were mainly made to right-of-use assets, other pro- visions and deferred taxes. Pihlajalinna has updated preliminary adjustments as follows: right-of-use as- sets EUR -9.8 million, other provisions EUR -4.3 million, financial lease liabilities EUR -6.0 million and goodwill EUR 0.5 million. EUR 1,000 2022 Consideration transferred Cash 35,193 Total acquisition cost 35,193 The preliminary values of the assets and liabilities acquired for consideration at the time of acquisition were as follows: EUR 1,000 Note 2022 Property, plant and equipment 12 430 Intangible assets 13 5,989 Right-of-use assets 14 103,048 Deferred tax assets 19 3,705 Trade and other receivables 13,196 Cash and cash equivalents 1,809 Total assets 128,176 Deferred tax liabilities 1,100 Restructuring provision 413 Lease liabilities 22 125,771 Other liabilities 8,458 Total liabilities 135,742 Acquired net assets -7,566 Goodwill generated in the acquisition: EUR 1,000 Note 2,022 Consideration transferred 35,193 Net identifiable assets of acquirees 7,566 Preliminary goodwill 13 42,759 Transaction price paid in cash: 35,193 Cash and cash equivalents of acquirees -1,809 Preliminary effect on cash flow 33,384 In the determination of fair values, intangible assets based on customer relationships, trademarks and patient databases were identified. The fair value of these was defined as EUR 5.5 million. The fair value was determined using an income-based approach, which requires a forecast of cash flows. In connection with the above, EUR 1.1 million were identified as a deferred tax liability. The merger of the businesses resulted in goodwill of EUR 42.8 million, which is based on the expected synergy benefits and skilled labour. Synergy benefits are based, for example, on an increase in the utiliza- tion rate of surgery, reception visits and diagnostic services. The generated goodwill is not tax deductible. The combined fair value of trade receivables and other receivables was EUR 13.2 million, which essen- tially corresponds to their book value, and there is no significant impairment risk associated with the re- ceivables. As a result of the merger of business operations described above, the turnover recorded in the finan- cial year 2022 was EUR 76 million, and the impact on the result of the financial year has been EUR 12.5 million. Costs related to acquisitions EUR 0.6 million have been recorded in other business expenses (IFRS 3 expenses). REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 65 Acquired business operations, others Pihlajalinna completed the acquisitions of Etelä-Savon Työterveys Oy, Lääkärikeskus Ikioma Oy and Punk- kibussi® unit on 1 April 2022. Pihlajalinna completed the acquisition of Mediellen Oy on 1 September 2022 and the acquisitions of Seppälääkärit Oy and Seppämagneetti Oy on 1 October 2022. The purchase price allocations on the acquisitions are currently being finalized and will be completed within one year from the acquisition date. Preliminary information on the acquisitions is presented combined below be- cause the acquisitions are not individually material: EUR 1,000 2022 Consideration transferred Cash 20,893 Contingent concideration 1,905 Total acquisition cost 22,798 The preliminary values of the assets and liabilities acquired for consideration at the time of acquisition were as follows: EUR 1,000 Note 2022 Property, plant and equipment 12 961 Intangible assets 13 2,194 Right-of-use assets 14 3,591 Available-for-sale financial assets 1 Deferred tax assets 19 61 Inventories 223 Trade and other receivables 2,331 Cash and cash equivalents 1,969 Total assets 11,330 Deferred tax liabilities 19 447 Provisions 153 Financial liabilities 22 466 Lease liabilities 3,778 Other liabilities 6,014 Total liabilities 10,858 Acquired net assets 471 Preliminary goodwill generated in the acquisition: EUR 1,000 Note 2022 Consideration transferred 22,798 Share of the acquisition allocated to non-controlling interest 41 Net identifiable assets of acquirees -471 Preliminary goodwill 13 22,368 Transaction price paid in cash: 20,893 Cash and cash equivalents of acquirees -1,969 Preliminary effect on cash flow 18,924 In the preliminary determination of fair values, intangible assets based on customer relationships, trade- marks, patient databases and non-compete agreements were identified. The preliminary fair value of these was defined as EUR 2.2 million. Fair value has been determined using an income-based approach, which requires a forecast of expected cash flows. In connection with the above, a calculated deferred tax liability of EUR 0.4 million was identified. The merger of the businesses resulted in a preliminary goodwill of EUR 22.4 million, which is based on the expected synergy benefits and skilled labour. About EUR 8 million of the generated goodwill is tax deductible. The combined fair value of trade receivables and other receivables was EUR 2.3 million, which essen- tially corresponds to their book value, and there is no significant impairment risk associated with the re- ceivables. As a result of the merger of business operations described above, the turnover recorded in the finan- cial year 2022 was EUR 16.5 million, and the impact on the result of the financial year has been EUR 1.5 million. Expenses related to the acquisition presented above, amounting to EUR 0.5 million, have been recog- nised in other operating expenses (IFRS 3 costs). Pro forma information If the business activities acquired in the 2022 fiscal year had been combined in the consolidated financial statements from the beginning of the fiscal year, the consolidated turnover for the fiscal year would have been EUR 706.5 million and the operating result would have been EUR 8.8 million. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 66 Acquisitions and capital expenditure Acquired entity Month of acquisition Industry Domicile Pohjola Hospital Oy 2/2022 Private clinic operations Helsinki Etelä-Savon Työterveys Oy 4/2022 Occupational healthcare services Mikkeli Lääkärikeskus Ikioma Oy 4/2022 Private clinic operations, Dental care Mikkeli Punkkibussi®-business 4/2022 Private clinic operations Several Mediellen Oy 9/2022 Private clinic operations Sotkamo Seppälääkärit Oy 10/2022 Private clinic operations Jyväskylä Seppämagneetti Oy 10/2022 Private clinic operations Jyväskylä Acquisition of non-controlling interests during the financial year 2022 In April 2022, Pihlajalinna redeemed 8 % of Pihlajalinna Turku Oy’s shares from the company’s non-control- ling interests. After the transaction, the Group’s ownership is 100 %. In November, Pihlajalinna redeemed 19 % of Laihian Hyvinvointi Oy’s shares from the company’s non-con- trolling interests. After the transaction, the Group’s ownership is 100 %. Acquired business operations 2021 EUR 1,000 Acquired entity Month of acquisi- tion Industry Domicile Työterveys Virta Oy 04/2021 Occupational health services Oulu Finla Työterveys Oy's Mänttä-Vilppula unit's business operations 11/2021 Occupational health services Mänttä-Vilppula EUR 1,000 2021 Consideration Cash, basic transaction price 17,941 Total cost of the combination 17,941 On the date of acquisition, the values of assets acquired and liabilities assumed were as follows: EUR 1,000 Note 2021 Property, plant and equipment 12 30 Intangible assets 13 2,195 Right-of-use assets 14 2,801 Available-for-sale financial assets 1 Deferred tax assets 83 Trade and other receivables 1,552 Cash and cash equivalents 1,527 Total assets 8,188 Deferred tax liabilities 435 Restructuring provision 300 Lease liabilities 22 2,801 Other liabilities 2,012 Total liabilities 5,549 Acquired net assets 2,640 Creation of goodwill in acquisition EUR 1,000 Note 2021 Consideration transferred 17,941 Net identifiable assets of acquirees -2,640 Goodwill 13 15,301 Transaction price paid in cash 17,941 Cash and cash equivalents of acquiree -1,527 Effect on cash flow 16,414 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 67 Customer contracts, non-compete agreements and patient databases were recognised in the acquisition as intangible assets separate from goodwill. The fair value of intangible assets has been determined on the basis of the standardised price level in business combinations and the discounted values of future cash flows. The remaining goodwill consists of expectations about returns, the skilled workforce of the acquired companies and synergy benefits. The acquisition-related expenses, a total of EUR 366 thousand, have been recorded under other operating expenses. Had the acquired business operations been consolidated since the beginning of the financial year, the con- solidated revenue for the review period would have amounted to EUR 616.3 million and operating profit would have totalled EUR 27.4 million. Acquisition of non-controlling interests during the financial year 2021 In August 2021, Pihlajalinna increased its holding in Kuusiolinna Terveys Oy, a joint venture with the munici- palities of Alavus, Ähtäri, Kuortane and Soini. The transaction was made with the municipality of Kuortane. After the transaction, the Group owns 97 per cent of the company. 27. Assets held for sale Accounting principles Non-current assets and assets and liabilities related to discontinued operations are classified as held for sale if their carrying amounts are expected to be recovered primarily through sale rather than through continu- ing use. Classification as held for sale requires that the asset (or disposal group) must be available for imme- diate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable. Prior to classification as held for sale, the assets or assets and liabilities related to a disposal group in ques- tion are measured according to the respective IFRS standards. From the date of classification, non-current assets held for sale are measured at the lower of the carrying amount and the fair value less costs to sell, and the recognition of depreciation and amortisation is discontinued. Non-current assets held for sale are presented in the statement of financial position separately from other items. The comparison figures for the statement of financial position are not restated. Pihlajalinna has classified its dental health services as assets held for sale effective from 31 December 2022. The Group has announced it will sell its dental care services to Hammas Hohde Oy. The deal in- cludes 16 clinics around Finland. About 200 oral health professionals work in them. The deal is expected to be finalized by the end of March. EUR 1,000 31 Dec 2022 Goodwill 3,004 Other intangible assets -19 Property, plant and equipment 1,585 Investments -5 Deferred tax assets 63 Inventories 372 Other receivables, current 205 Assets held for sale 5,255 Other liabilities, current 1,081 Liabilities directly attributable to assets held for sale 1,081 Net assets 4,175 28. Subsidiaries and material non-controlling interests The Group’s structure The Group had 34 (28) subsidiaries in 2022. Of these subsidiaries, 20 (14) are wholly-owned and 14 (14) are partially owned. A list of all of the Group’s subsidiaries is presented in Note 31 Related party transactions. In 2022, the Group had 3 (2) associated companies and 1 (1) joint operation. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 68 Breakdown of material non-controlling interests in the Group Non-controlling interests’ share of the votes Non-controlling interests’ share of profit or loss Non-controlling interests’ share of equity EUR 1,000 Main busines loca- tion 2022 2021 2022 2021 2022 2021 Jämsän Terveys Oy Jämsä 49% 49% -2462 -1653 -3885 -1422 Pihlajalinna Eritysasumispalvelut Oy Hämeenlinna 30% 30% 79 -72 -130 -209 Dextra Lapsettomuusklinikka Oy Helsinki 49% 49% 227 414 418 851 Pihlajalinna Liikuntakeskukset Group several 30% 30% -401 -245 1453 1854 Suomen Yksityiset Hammaslääkärit Group several 37% 37% 76 -3 469 393 Total -2,482 -1,559 -1,675 1,467 Summary of financial information on subsidiaries with a material non-controlling interest Jämsän Terveys Oy Pihlajalinna Erityisa- sumispalvelut Oy Dextra Lapsettomuusklinikka Oy Pihlajalinna Liikun- takeskukset Group Suomen Yksityiset Ham- maslääkärit Group 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Current assets 5,381 42,550 767 544 1,026 1,715 1,742 1,326 248 270 Non-current assets 1,233 1,808 4,306 4,524 3,720 1,369 37,168 37,694 1,962 2,087 Current liabilities 14,144 46,686 1,464 1,672 860 695 17,278 15,392 807 1,193 Non-current liabilities 324 481 4,016 4,062 2,342 18 17,603 18,239 19 20 Revenue 75,231 75,022 6,370 4,302 5,201 5,980 12,653 12,579 4,401 4,392 Operating profit -4,522 -3,576 407 -214 584 1,149 -922 -458 276 12 Profit/loss -4,984 -3,376 268 -238 519 897 -1,532 -818 85 8 Share of profit/loss attributable to owners of the parent -2,521 -1,722 190 -212 292 483 -1,130 -573 10 11 Non-controlling interests’ share of profit/loss -2,462 -1,653 79 -72 227 414 -401 -245 76 -3 Net cash flow from operating activities -1,783 -3,911 852 18 1,157 1,386 4,122 4,158 531 155 Net cash flow from investing activities 18 -137 423 -2,164 6,064 -600 5,989 -1,512 -114 298 Net cash flow from financing activities 2,120 -201 -1,274 2,146 -7,217 -793 -9,912 -2,620 -494 -435 of which dividends paid to non-controlling interests -660 -215 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 69 29. Interests in associates and joint arrangements Accounting policies Associates are companies over which the Group has significant influence. As a rule, significant influence is established when the Group holds more than 20% of a company’s voting power or otherwise has significant influence but no control. A joint arrangement is an arrangement of which two or more parties have joint control. Joint control in- volves contractually agreed sharing of control of an arrangement, which exists only when decisions about relevant activities require the unanimous consent of the parties sharing control. A joint arrangement is ei- ther a joint operation or a joint venture. A joint venture is an arrangement whereby the Group has rights to the net assets of the arrangement, whereas in a joint operation the Group has rights to the assets, and obli- gations for the liabilities, relating to the arrangement. Associates and joint ventures are consolidated using the equity method. If the Group’s share of the loss of an associate or a joint venture exceeds the carrying amount of the investment, then the investment is car- ried at zero value, and the losses exceeding the carrying amount are not consolidated, unless the Group is committed to fulfilling the obligations of the associate or joint venture. An investment in an associate or a joint venture includes the goodwill generated through the acquisition. Unrealised profits between the Group and an associate or a joint venture are eliminated in proportion to the Group’s ownership interest. The Group’s pro rata share of an associate’s or a joint venture’s profit for the financial year is included in operating profit. EUR 1,000 2022 2021 Interests in associates Ullanlinnan Silmälääkärit Oy 31 20 Digital Healt Solutions Oy 609 288 Kuura Digilääkärit Oy 1,428 0 Interests in joint operations Koy Levin Pihlaja Oy 40 40 Total carrying amount 2,109 348 Interests in associates Name Holding, % Name 2022 2021 Ullanlinnan Silmälääkärit Oy Helsinki Healthcare services 37% 37% Digital Health Solutions Oy Sotkamo All legal business 41% 18% Kuura Digilääkärit Oy Helsinki Healthcare services 45% The Group's pro rata share of an associate's or a joint venture's profit for the financial year is presented separately in operating profit up to the carrying amount of the Group’s investment in their shares. Interests in joint operations The Group owns 31% in Kiinteistö Oy Levin Pihlaja, which is consolidated as a joint operation according to the pro rata share. 30. Contingent assets and liabilities and commitments Collateral given on own behalf 2022 2021 Sureties 4,158 4,407 Properties’ VAT refund liability 33 59 Lease commitments for off-balance sheet leases 1,312 849 Lease deposits 561 535 Contingent liability Pihlajalinna has complete outsourcing agreements with entities that were part of Pirkanmaa Hospital Dis- trict. The operations of Pirkanmaa Hospital District ended on 31 December 2022 as the Pirkanmaa wellbe- ing services county started its operations on 1 January 2023. In accordance with Pirkanmaa Hospital Dis- trict’s basic agreement, Pirkanmaa Hospital District has, due to the termination of its operations, invoiced its member municipalities for their share of covering the hospital district’s negative result. As some of the member municipalities have a complete outsourcing agreement with Pihlajalinna for the provision of so- cial and healthcare services, the Group has received invoice attachments totalling approximately EUR 0.5 million in early 2023 in relation to covering the hospital district’s negative result. The management’s as- sessment is that covering the negative result arising from the termination of the hospital district’s opera- tions is not the responsibility of the Group companies, but rather the responsibility of the hospital district’s member municipalities. Consequently, the management does not consider it likely that the matter will lead to an outflow of economic resources from the Group, which means that, according to the Group’s interpre- tation, the invoiced amounts constitute a contingent liability in accordance with IAS 37. Lawsuits and official proceedings The City of Jämsä has taken legal action against Jämsän Terveys Oy regarding a matter concerning the price adjustment provision in the service agreement. The difference in views regarding whether the fixed annual price for social and healthcare services can decrease due to price. Jämsän Terveys filed an additional coun- terclaim against the City of Jämsä. The additional counterclaim concerns the effect of changes in the ser- vices under the service agreement on price and the service provider’s liability for financing investments by the Pirkanmaa Hospital District insofar as such investments serve operations after the term of the service agreement. The service provider is entitled to price adjustments corresponding to increases in costs and the contractual parties are under an obligation to negotiate and try to reach an agreement. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 70 On 4 April 2022, the District Court of Central Finland handed down its ruling on the dispute concerning the service agreement between Jämsän Terveys Oy and the City of Jämsä. The District Court did not deny the validity of the grounds for the variable charges in Jämsän Terveys’ service agreement, but the District Court found that the evidence presented regarding the realisation of the costs was insufficient. The situa- tion and the effects of the dispute are described in more detail in note 1 Revenue from contracts with cus- tomers under Items that may, according to the management’s estimate, influence the profitability of com- plete outsourcing agreements with a delay . Jämsän Terveys has filed an appeal regarding the District Court’s ruling to the Court of Appeal. The City of Jämsä has criticized the decision of the 2022 annual general meeting of Jämsän Terveys Oy re- garding the increase in working capital according to the shareholders’ agreement. The case is pending in the District Court of Central Finland. Pihlajalinna is involved in certain pending legal proceedings concerning employment relationships, but they are not expected to have a significant financial impact on the Group. 31. Related party transactions The Group’s related parties consist of the subsidiaries, associates and joint ventures. Key management per- sonnel considered related parties consist of the members of the Board of Directors and the Management Team, including the CEO and their family members. The Group’s parent company and subsidiary relationships The Group’s parent company is Pihlajalinna Plc, which owns all of Pihlajalinna Terveys Oy’s Series A shares. Company Domicile Holding % of votes Pihlajalinna Terveys Oy Parkano 100% 100% Ikipihlaja Johanna Oy Jämsä 100% 100% Jokilaakson Terveys Oy Jämsä 90% 90% Pihlajalinna Lääkärikeskukset Oy Helsinki 100% 100% Mäntänvuoren Terveys Oy Mänttä-Vilppula 91% 91% Ikipihlaja Kuusama Oy Kokemäki 100% 100% Ikipihlaja Sofianhovi Oy Mänttä-Vilppula 100% 100% Wiisuri Oy Jyväskylä 100% 100% Ikipihlaja Matinkartano Oy Lieto 100% 100% Ikipihlaja Setälänpiha Oy Lieto 100% 100% Ikipihlaja Oiva Oy Raisio 100% 100% Kolmostien Terveys Oy Parkano 96% 96% Jämsän Terveys Oy Jämsä 51% 51% Kuusiolinna Terveys Oy Alavus 97% 97% Lääkäriasema DokTori Oy Lappeenranta 100% 100% Kompassi Lääkärikeskus Oy Seinäjoki 100% 100% Mediapu Oy Oulu 100% 100% Pihlajalinna Turku Oy Turku 100% 100% Pihlajalinna Erityisasumispalvelut Oy Hämeenlinna 70% 70% Pihlajalinna Oulu Oy Oulu 100% 100% Dextra Lapsettomuusklinikka Oy Helsinki 51% 51% Bottenhavets Hälsa Ab - Selkämeren Terveys Oy Kristiinankaupunki 75% 75% Linnan Klinikka Oy Hämeenlinna 100% 100% Pihlajalinna Liikuntakeskukset Oy Tampere 70% 70% Forever Helsinki Oy Helsinki 70% 70% Suomen Yksityiset Hammaslääkärit Oy Tampere 63% 63% Pihlajalinna Hammasklinikat Oy Tampere 63% 63% Laihian Hyvinvointi Oy Laihia 100% 100% Pihlajalinna Omasairaala Oy Helsinki 100% 100% Pihlajalinna Etelä-Savo Oy Mikkeli 100% 100% Pihlajalinna Ikioma Oy Mikkeli 93% 93% Pihlajalinna Kainuu Oy Sotkamo 70% 70% Seppämagneetti Oy Jyväskylä 100% 100% Seppälääkärit Oy Jyväskylä 100% 100% Information on the associates is presented in Note 28 Interests in associates and joint arrangements. . Employee benefits of management EUR 1,000 2022 2021 Monetary salaries, Management Team 1,030 1,054 Share-based rewards, Management Team 65 226 Fringe benefits, Management Team 10 16 Post-employment benefits, Management Team 182 Salaries and other short-term employee benefits, Management Team, total 1,288 1,297 Salaries and remuneration REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 71 EUR 1,000 2022 2021 Joni Aaltonen, CEO Monetary salaries 287 283 Share-based rewards 32 100 Fringe benefits 20 21 Total 339 405 Based on the CEO's salary and bonuses, accrual-based pension costs of 21 thousand euros in 2022 (2021: 20 thousand euros) in accordance with the Employee Pension Act (TyEL) have been recorded. EUR 1,000 2022 2021 Board of Directors Vice-Chairman of the Board Leena Niemistö 53 58 Chairman of the Board Mikko Wirén 261 345 Chairman of the Audit Committee Seija Turunen 50 53 Board member Kati Sulin (until 12 June 2022) 17 42 Board member Matti Jaakola (until 15 June 2021 ) 0 9 Board member Hannu Juvonen 40 41 Board member Heli Iisakka (since 13 April 2022) 34 0 Board member Mika Manninen 36 41 Total 491 588 Of the annual remuneration paid in shares, a total of 0 (5,000) shares held by the company were transferred to the Chairman of the Board of Directors, with 1,423 (1,212) shares transferred to the Vice Chairman and the Chairman of the Audit Committee each, and 949 (808) shares to each member of the Board of Directors. According to the CEO’s contract, the notice period for dismissal is 3 months. The company is liable to pay the CEO one-time compensation for termination amounting to six months’ total salary. The CEO’s pension bene- fits are according to the statutory pension scheme. The CEO is not a member of the Board of Directors. Related party transactions and related party receivables and liabilities: 2022 2021 Key management personnel Rents paid 919 834 Services procured 1,064 958 Prepayments -96 0 Trade payables 105 83 The Group has leased several of its business premises from the Chairman of the Board of Directors: the premises in Nokia, Karkku, Tampere and Kangasala. A Group company has an agreement with the Chairman of the Board of Directors, under which the Group buys healthcare professionals’ services. 32. Events after the balance sheet date On 10 January 2023, the Group announced it would commence change negotiations. The change negotia- tions are still under way and the aim is to complete them within the target time of six weeks. The change negotiations concern the network of private clinics, regional management and the Groups’s general man- agement. Approximately 650 persons are within the scope of the functions in question. According to the company’s preliminary estimate, the negotiations may lead to a reduction of 40 – 60 positions in Pihlajalinna, and the administrative duties of 30 – 40 employees may be discontinued or reduced. The allocation of the planned measures and their impacts on the personnel will be discussed in more detail during the negotia- tions. The Group has, on 2 February 2023, sold the interest rate swap. The fair value of the interest rate swap at the time the agreement was concluded was approximately EUR 3.9 million. On the same day, the Group has signed a new interest rate swap agreement with a nominal value of EUR 65 million to protect its financing arrangement from variable interest rates. Cash flow hedge accounting is applied to the interest rate swap. The start date of the interest rate swap agreement is in March 2023. Based on the agreement, the Group pays a fixed interest rate of 2.80 per cent and receives a variable 6-month Euribor interest rate from the start date. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 72 PARENT COMPANY FINANCIAL STATEMENTS, FAS Parent company income statement, FAS EUR 1,000 Note 2022 2021 Revenue 1.1. 6,757 5,205 Other operating income 1.2. 444 459 Personnel expenses 1.3. -1,228 -1,350 Depreciation, amortisation and impairment 1.4. -2,215 -2,004 Other operating expenses 1.5 -6,283 -4,795 Operating profit (loss) -2,526 -2,486 Financial income and expenses 1.6 -3,207 -565 Profit (loss) before appropriations and taxes -5,732 -3,051 Appropriations 1.7 Change in depreciation difference 104 -32 Group contribution 0 20,350 Income taxes 1.8. 1,124 -3,373 Profit (loss) for the financial year -4,504 13,893 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 73 Parent company balance sheet, FAS EUR 1,000 Note 2022 2021 Assets Non-current assets Intangible assets 2.1 3,731 4,048 Property, plant and equipment 2.2 1,742 2,155 Investments 2.3 384,535 284,835 390,009 291,038 Current assets Non-current receivables 2.4 1,160 37 Current receivables 2.5 59,571 82,787 Cash and cash equivalents 4,223 2,179 64,954 85,002 Total assets 454,963 376,040 Equity and liabilities Equity 2.6 Share capital 80 80 Reserve for invested unrestricted equity 183,190 183,190 Retained earnings 32,548 26,152 Profit/loss for the financial year -4,504 13,893 211,314 223,316 Accumulated appropriations 2.7 914 1,018 Mandatory provisions 2.8 0 21 Liabilities 2.9 Non-current liabilities 167,003 90,368 Current liabilities 75,732 61,316 242,735 151,685 Total equity and liabilities 454,963 376,040 Parent company cash flow statement, FAS EUR 1,000 2022 2021 Cash flow from operating activities Profit for the period -4,504 13,893 Depreciation, amortisation and impairment 2,215 2,004 Financial income and expenses 3,207 565 Other adjustments (appropriations and taxes) -1,228 -16,944 Cash flow before change in working capital -310 -482 Change in net working capital 667 -2,699 Cash flows from operating activities before financial items and taxes 357 -3,181 Interest received 4,507 1,449 Direct taxes paid -4,259 -2,416 Cash flow from operating activities 605 -4,149 Cash flow from investing activities Investments in tangible and intangible assets -1,486 -904 Other investments 300 -350 Investments in subsidiaries -100,000 0 Cash flow from investing activities -101,186 -1,254 Cash flow from financing activities Proceeds from short-term borrowings from group companies 9,543 11,724 Loans granted to group companies 9,650 -17,973 Proceeds from long-term borrowings 209,000 20,000 Repayment of long-term borrowings -132,774 -20,771 Group contributions received 20,350 14,000 Interest paid -4,903 -2,139 Dividends paid -6,767 -4,517 Acquisition of own shares -1,475 -582 Cash flow from financing activities 102,624 -258 Change in cash and cash equivalents 2,044 -5,661 Cash at the beginning of the financial year 2,179 7,840 Cash at the end of the financial year 4,223 2,179 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 74 Notes to the financial statements 31 December 2022 Accounting policies Pihlajalinna Plc (2617455-1), domiciled in Tampere, is the parent company of Pihlajalinna Group. The com- pany was established on 15 April 2014. Valuation of non-current assets Intangible assets and tangible assets have been recognised in the balance sheet at cost. Depreciation and amortisation according to plan is calculated using the straight-line method over the economic useful lives of the assets. The planned depreciation periods are as follows: Development costs 5–7 years Other intellectual property rights 5–7 years Other long-term expenditures 5–7 years Machinery and equipment 3–10 years Acquisition costs of assets included in non-current assets with a probable economic useful life of less than 3 years, and small-scale acquisitions (value under EUR 850) have been expensed in the financial year during which they were acquired in full. Financial assets are measured at the lower of cost or fair market, if the im- pairment is considered to be permanent. Recognition of deferred taxes Deferred tax liabilities or assets have been calculated on the temporary differences between taxation and the financial statements, using the prevailing tax base at balance sheet date. The balance sheet includes de- ferred tax liabilities in their entirety and deferred tax assets in the amount of the estimated probable receiv- ables. Revenue recognition The sale of products and services is recognised in connection with their delivery. Capitalised development costs (Accounting Ordinance 2:4, 3-4) The company’s capitalised product development expenditure relating to the Pihlajalinna mobile application and the company website will be amortised over their economic useful lives. Unamortised development ex- penditure included in intangible assets, which restricts profit distribution, amounted to EUR 258 (489) thou- sand at the end of the financial year. Recognition of pension schemes The personnel’s statutory pension security is handled by an external pension insurance company. Pension costs are recognised as expenses during the year of their accrual. Derivative financial instruments The company has an interest swap agreement that is used to hedge floating rate financing arrangement. The company present the interest swap agreement according to prudent basis (Accounting Board 2016/1963). The negative value of the interest swap agreement is recorded based on the lowest value as an expense and a liability. The positive unrealized value is presented as an off balance sheet item and income statement item and presented only in the Notes. 1.1. Revenue EUR 1,000 2022 2021 Revenues by sector Sale of services 6,757 5,205 6,757 5,205 1.2. Other operating income EUR 1,000 2022 2021 Rental income 116 116 Lease income from equipment 328 328 Government grants received 0 14 444 459 1.3. Personnel expenses EUR 1,000 2022 2021 Wages and salaries -1,096 -1,234 Pension costs -115 -100 Other social security expenses -16 -16 -1,228 -1,350 Average number of employees during the financial year 3 3 The remuneration of the Board of Directors of Pihlajalinna Plc is included in the company’s personnel ex- penses. The Annual General Meeting of 13 April 2022 decided that remuneration shall be paid to the mem- bers of the Board of Directors as follows: to the full-time Chairman of the Board of Directors EUR 250,000 per year; to the Vice-Chairman of the Board and the Chairman of the Audit Committee EUR 39,000 per year, and to members EUR 26,000 per year. The annual remuneration shall be paid in company shares and in cash, with approximately 40 per cent of the remuneration used to acquire shares in the name and on behalf of the members of the Board of Direc- tors, and the remainder paid in cash. The remuneration can be paid either entirely or partially in cash if the REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 75 member of the Board of Directors has, on the day of the General Meeting, 13 April 2022, been in possession of over EUR 1,000,000 worth of company shares. The company is responsible for the expenses and transfer tax arising from the acquisition of the shares. The remuneration to be paid in company's own shares was completed by handing over to the members of the Board a total of 6,642 own shares in May. Rest of the an- nual remuneration was paid at the same time in cash. If the term of a Board member ends before the An- nual General Meeting of 2023, the Board is entitled to decide on the possible recovery of the remuneration in a manner it deems appropriate. In addition, the Annual General Meeting decided that each Board member shall be paid a meeting fee of EUR 500 for each Board and Committee meeting. furthermore, reasonable travel expenses of the members of the Board of Directors are reimbursed in accordance with the Company's travel policy. 1.4. Depreciation and impairment EUR 1,000 2022 2021 Depreciation according to plan Intangible assets -1,802 -1,593 Property, plant and equipment -413 -411 -2,215 -2,004 1.5. Other operating expenses EUR 1,000 2022 2021 Voluntary social security expenses 32 -111 Facility expenses -130 -120 Vehicle expenses -17 -19 ICT expenses -4,983 -3,560 Machinery and equipment expenses -1 Sales, marketing and travel expenses -48 -77 Administrative expenses -1,136 -848 Other operating expenses, total -6,283 -4,735 Auditor’s fees Audit fees 126 113 Auxiliary services 6 126 119 1.6. Financial income and expenses EUR 1,000 2022 2021 Interest income from non-current investments From Group companies 1,841 1,449 From others 2 0 Interest income from non-current investments, total 1,842 1,449 Interest expenses and other financial expenses To others -5,049 -2,013 Interest expenses and other financial expenses, total -5,049 -2,013 Financial income and expenses, total -3,207 -565 1.7. Appropriations EUR 1,000 2022 2021 Difference between depreciation according to plan and depreci- ation in taxation 104 -32 Group contributions received 20,350 104 20,318 1.8. Income taxes EUR 1,000 2021 2021 Change in deferred tax assets 1,124 Income taxes on actual operations during the financial year -3,373 Income taxes total 1,124 -3,373 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 76 Notes to the balance sheet 2.1. Intangible assets EUR 1,000 2022 2021 Development costs Acquisition cost at the start of the financial year 1,607 1,607 Acquisition cost at the end of the period 1,607 1607 Accumulated depreciation at beginning of period -1,118 -854 Depreciation and amortisation for the period -230 -264 Carrying amount at the end of period 258 489 Other intellectual property rights Acquisition cost at the start of the financial year 1,658 1,615 Additions 0 43 Acquisition cost at the end of the period 1,658 1,658 Accumulated depreciation at beginning of period -1,249 -1,028 Depreciation and amortisation for the period -215 -221 Carrying amount at the end of period 194 409 Other long-term expenditures Acquisition cost at the start of the financial year 6,051 5,264 Additions 1,331 787 Transfers between items 67 0 Acquisition cost at the end of the period 7,449 6,051 Accumulated depreciation at beginning of period -2,979 -1,871 Depreciation and amortisation for the period -1,356 -1,108 Carrying amount at the end of period 3,114 3,072 Prepayments for intangible assets Acquisition cost at the start of the financial year 79 6 Additions 153 73 Transfers between items -67 0 Carrying amount at the end of period 166 79 Intangible assets, total Acquisition cost at the start of the financial year 9,394 8,492 Additions 1,485 903 Acquisition cost at the end of the period 10,879 9,394 Accumulated depreciation at beginning of period -5,346 -3,753 Depreciation and amortisation for the period -1,802 -1,593 Carrying amount at the end of period 3,731 4,048 2.2. Property, plant and equipment EUR 1,000 2022 2021 Machinery and equipment Acquisition cost at the start of the financial year 3,584 3,472 Additions 1 112 Acquisition cost at the end of the period 3,585 3,584 Accumulated depreciation at beginning of period -1,430 -1,018 Depreciation and amortisation for the period -413 -411 Carrying amount at the end of the period 1,742 2,155 Other intellectual property rights Acquisition cost at the start of the financial year 3,584 3,472 Additions 1 112 Acquisition cost at the end of the period 3,585 3,584 Accumulated depreciation at beginning of period -1,430 -1,018 Depreciation and amortisation for the period -413 -411 Carrying amount at the end of the period 1,742 2,155 2.3. Investments EUR 1,000 2022 2021 Other shares and participations Acquisition cost at the start of the financial year 350 0 Additions 0 350 Disposals -300 0 Acquisition cost at the end of the period 50 350 Shares in subsidiaries Acquisition cost at the start of the financial year 284,485 284,485 Additions 100,000 0 Acquisition cost at the end of the period 384,485 284,485 Total investments 384,535 284,835 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 77 A full list of the Group’s subsidiaries is presented in Note 31 “Related party transactions” to 'the consoli- dated financial statements. 2.4. Non-current receivables EUR 1,000 2022 2021 Receivables from others Lease deposits given 37 37 Deferred tax assets 1,124 Total non-current receivables 1,160 37 2.5. Current receivables EUR 1,000 2022 2021 Receivables from others Trade receivables 12 26 Other receivables 865 376 Prepayments and accrued income 5,553 2,195 6,431 2,597 Receivables from Group companies Trade receivables 771 -43 Loan receivables 50,882 59,788 Prepayments and accrued income 1,487 20,445 53,140 80,190 Material items included under Prepayments and accrued in- come Group contribution 0 20,350 Accrued direct taxes 1,490 Allocation of sales 672 95 Accrued social security expenses 112 85 Accrued trade payables 3,952 2,051 Other 815 58 7,040 22,639 Total current receivables 59,571 82,787 2.6. Equity EUR 1,000 2022 2021 Restricted equity Share capital at the beginning 80 80 Share capital at the end 80 80 Total restricted equity 80 80 Unrestricted equity Reserve for invested unrestricted equity at the beginning 183,190 183,190 Reserve for invested unrestricted equity at the end 183,190 183,190 Retained earnings at the beginning 40,045 31,251 Dividends paid -6,767 -4,517 Acquisition of own shares -1,475 -582 Retained earnings 32,548 26,152 Profit for the period -4,504 13,893 Total unrestricted equity 211,234 223,236 Total equity 211,314 223,316 Retained earnings 32,548 26,152 Result for the period -4,504 13,893 Reserve for invested unrestricted equity 183,190 183,190 Capitalised development costs -258 -489 Distributable unrestricted equity 210,976 222,747 Shares in subsidiaries 22,620,135 22,620,135 of which treasury shares 70,491 25,900 Number of outstanding shares 22,549,644 22,594,235 2.7. Accumulated appropriations EUR 1,000 2022 2021 Accumulated depreciation difference 914 1,018 2.8. Mandatory provisions EUR 1,000 2022 2021 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 78 Onerous contracts 0 21 2.9. Liabilities EUR 1,000 2022 2021 2.9.1 Non-current liabilities Liabilities to others Loans from financial institutions 167,000 90,000 Other non-current liabilities 3 332 Lease deposits received 0 36 Non-current liabilities, total 167,003 90,368 2.9.2 Current liabilities Liabilities to others Trade payables 5,430 297 Other liabilities 365 811 Accrued liabilities 651 3,062 6,447 4,170 Liabilities to Group companies Trade payables 4 1 Accrued liabilities 2,703 111 Other liabilities 66,578 57,035 69,285 57,147 Material items included under Accrued liabilities Personnel expense allocations 171 149 Interest allocations 2,876 65 Taxes 0 2,769 Other items 307 189 3,354 3,172 Current liabilities, total 73,067 61,316 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 79 Other notes EUR 1,000 2022 2021 Collaterals and contingent liabilities Collaterals given on behalf of Group companies Other sureties 121 121 Pihlajalinna’s financing arrangements Pihlajalinna rearranged its long-term debt financing with a sustainability-linked financing arrangement on 22 March 2022. The EUR 200 million unsecured financing arrangement, for three years with an option for a fur- ther two years, was concluded with Danske Bank, OP Corporate Bank and Swedbank (the creditor banks). The financing comprises a long-term loan of EUR 130 million and a revolving credit facility of EUR 70 million for general financing needs and acquisitions. It also includes an opportunity to later increase the total amount by EUR 100 million (to EUR 300 million), subject to separate decisions on a supplementary loan from the funding providers. The financing arrangement includes the customary financial covenants concerning leverage (ratio of net debt to pro forma EBITDA) and gearing. IFRS 16 lease liabilities are not taken into account in the calculation of the covenants (Frozen GAAP). The loan margin of the financing is additionally linked to Pihlajalinna’s an- nual sustainability objectives related to patient satisfaction (NPS), employee engagement (eNPS) and access to surgical treatment within the target time. At the end of the financial year, the sustainability targets linked to the financing arrangement caused no changes in the loan margins. Due to the acquisition of Pohjola Hospital Ltd, Pihlajalinna and the creditor banks agreed on increasing the gearing covenant to 140 per cent and the leverage covenant to 4.00 for 2022. Pihlajalinna and the creditor banks agreed on a temporary adjustment to the covenants of the financing arrangement twice in the latter part of the year. According to the acquired waivers, the leverage covenant was set at 5.5 for the fourth quarter of 2022 and the first three quarters of 2023, gearing must not exceed 140 per cent. The financing arrangement’s original gearing covenant of 115 per cent will enter into effect on the fourth quarter of 2023. Starting from the beginning of the third quarter of 2023, the leverage covenant according to the financing arrangement will be 3.75. At the end of the financial year, leverage in accordance with the financing arrangement stood at 5.23 and gearing was 139.95 per cent. If the Group’s result after taxes had been around 40 thousand euros lower, the gearing covenant level would have been broken. On the other hand, the fair value of the company’s interest rate swap agreement was EUR 5.1 million in the financial statements. If the interest rate swap had been sold at the time of the financial statements, gearing would have decreased to 136.0 per cent and leverage to 5.08. Violation of the covenant conditions can lead to the maturity of the financing arrangements. Under the waiver agreement, the highest margin level of the financing arrangement increased to one per cent units from the beginning of 2023 until the third quarter of the year. The increase to the highest margin level and the other waiver terms will be discontinued by the end of 2023. If the company proposes to re- main below the original covenant levels for the next 12 months, the additional provision described above may be discontinued earlier. The raised loan amount in the financial statements on 31 December 2022, to which the covenant terms are applied, is EUR 167.0 (90.0) million. The company has entered in March 2022 into interest rate swap agreement with a nominal value of EUR 65 million, which is used to convert the interest on a floating rate financing arrangement to a fixed rate. The interest rate swap is valid until 25 March 2027 and the interest rate swap fair value was EUR 5.1 million at the end of the financial year. The interest rate swap starting date is in March 2023. The company present the interest swap agreement according to prudent basis and the positive unrealized value has not been rec- orded as a profit to the parent company’s financial statement. The Group has credit limit agreements valid until further notice, totalling EUR 10 million. The notice pe- riod of the credit limit agreements is one month. At the end of the financial year, Pihlajalinna had EUR 43.0 (45.0) million in unused committed credit limits. Furthermore, an additional credit limit of EUR 100 million, which is subject to a separate credit decision, is unused. EUR 1,000 2022 2021 Lease commitments Within one year 146 23 Between one and five years 230 569 Over five years later 0 71 REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 80 Dates and signatures to the report by the Board of Directors and the financial statements Tampere, 16 February 2023 Mikko Wirén Leena Niemistö Heli Iisakka Seija Turunen Chairman Hannu Juvonen Mika Manninen Joni Aaltonen CEO Auditor’s Note A report on the performed audit has been issued today. Tampere 20 February 2023 KPMG Oy Ab Lotta Nurminen Authorised Public Accountant REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 81 Auditor’s Report To the Annual General Meeting of Pihlajalinna Plc Report on the Audit of the Financial Statements Opinion We have audited the financial statements of Pihlajalinna Plc (business identity code 2617455-1) for the year ended 31 December 2022. The financial statements comprise the consolidated statement of financial posi- tion, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies, as well as the parent company’s balance sheet, income statement, cash flow statement and notes. In our opinion ● the consolidated financial statements give a true and fair view of the group’s financial position, financial performance and cash flows in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU ● the financial statements give a true and fair view of the parent company’s financial performance and fi- nancial position in accordance with the laws and regulations governing the preparation of financial state- ments in Finland and comply with statutory requirements. Our opinion is consistent with the additional report submitted to the Audit Committee. Basis for Opinion We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements. In our best knowledge and understanding, the non-audit services that we have provided to the parent company and group companies are in compliance with laws and regulations applicable in Finland regarding these services, and we have not provided any prohibited non-audit services referred to in Article 5(1) of reg- ulation (EU) 537/2014. The non-audit services that we have provided have been disclosed in note 6 to the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Materiality The scope of our audit was influenced by our application of materiality. The materiality is determined based on our professional judgement and is used to determine the nature, timing and extent of our audit proce- dures and to evaluate the effect of identified misstatements on the financial statements as a whole. The level of materiality we set is based on our assessment of the magnitude of misstatements that, individually or in aggregate, could reasonably be expected to have influence on the economic decisions of the users of the financial statements. We have also taken into account misstatements and/or possible misstatements that in our opinion are material for qualitative reasons for the users of the financial statements. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our au- dit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The significant risks of material misstatement referred to in the EU Reg- ulation No 537/2014 point (c) of Article 10(2) are included in the description of key audit matters below. We have also addressed the risk of management override of internal controls. This includes consideration of whether there was evidence of management bias that represented a risk of material misstatement due to fraud. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 82 The key audit matter How the matter was addressed in the audit Judgmental items relating to municipality outsourcing contracts (refer to notes 1 Revenue from contracts with customers, 16 Trade and other receivables and 30 Contingent assets and liabilities and commitments in the consolidated financial statements) and emphasis of matter We draw attention to note 1 and the receivables totalling EUR 7.4 million presented in sections Key accounting estimates and decisions based on management judgement and Items that may, according to the management’s estimate, influence the profitability of complete outsourcing agreements with a delay. Circumstances described in the notes may affect the payments to be received for these receivables. Our opinion is not modified in respect of this matter. ● A notable proportion of the Group’s revenue is based on long-term outsourcing contracts with municipalities. These include both complete outsourcing contracts for social and healthcare services as well as other outsourcing contracts. ● The Group’s profitability of complete outsourcing contracts for social and healthcare services may become more accurate with a de- lay. The Group may not always be aware of the actual costs of the agreements during the financial year and there may be variable considerations included. ● High level of management judgement, which can have a significant impact on the consolidated result and statement of financial posi- tion, is involved in the accounting for outsourcing contracts due to the extent of the contracts, definitions of contractual obligations and amendment clauses for changed situations. ● In note 1 section Items that may, according to the management’s estimate, influence the profitability of complete outsourcing agree- ments with a delay the following items relating to outsourcing contracts with municipalities are presented: ● During the financial year, Jämsän Terveys Oy has recognised as revenue and recorded in its receivables EUR 1.2 million, mainly COVID-19-related cost compensation for the current year, which the client has not paid in breach of the service agreement. In addition, a difference of opinion has emerged between the company and the client during the financial year on the impact of the transfer of personnel on the annual fee under the service agreement. Jämsän Terveys Oy has filed an appeal regarding the District Court’s ruling to the Court of Appeal in the dispute regarding the service agreement. The company has made accounting entries in accordance with the District Court’s ruling in the consolidated financial statements, but the ruling is not final. ● Mäntänvuoren Terveys Oy has receivables totaling EUR 4.3 million from a client. The receivables are associated with an estimate of the investment cost liability in specialised care and cost increases caused by service changes. ● Kolmostien Terveys Oy has receivables of EUR 1.3 million from a client. The receivables are associated with an estimate of the in- vestment cost liability in specialised care and COVID-19 cost compensation. ● Pihlajalinna Terveys Oy, the lead contracting partner for complete outsourcing, has recorded in its receivables variable compensa- tion totaling EUR 0.6 million based on the agreements ● Due to the significant amount of accounting estimates in relation to the result for the period and equity and the receivables being past due, recognized judgmental items relating to the municipality outsourcing contracts are considered a key audit matter. ● We observed the judgmental items recorded in the consolidated financial statements through discussions with management, analytically and by per- forming substantive testing. We obtained related agreements, calculations and administrative documents. ● We obtained legal opinions on the service agreements and juridical basis for recognizing these items from a law firm used by the Group. ● We obtained legal representation letter about the pending legal dispute in the Court of Appeal. ● We assessed the recognition principles applied to judgmental income and ex- pense items against IFRS principles and considered the appropriateness of the Group’s disclosures in respect of judgmental items. ● We assessed how the Group has received payments relating to previously rec- ognized judgmental items and obtained a representation letter from the man- agement about the collectability of these receivables. ● We reported in more detail about the contents of these judgmental items to the Audit Committee and the Board of Directors. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 83 Goodwill impairment assessment (refer to note 13 Intangible assets and goodwill in the consolidated financial statements) ● The Group has expanded its activities through acquisition of companies. As a result, the consolidated statement of financial position 31 December 2022 includes goodwill totalling 251.0 million euros. ● Goodwill is not amortized but is tested at least annually for impairment. Determining the cash flow forecasts underlying the impair- ment tests requires management make judgments over certain key inputs, for example revenue growth rate, discount rate, long- term growth rate and inflation rates. ● Due to the high level of judgement related to the forecasts used, and the significant carrying amounts involved, goodwill impairment assessment is considered a key audit matter. ● Our audit procedures included, among others, assessing key inputs in the im- pairment calculations such as revenue growth rate, profitability and discount rate, by reference to the parent company’s Board approved budgets, data ex- ternal to the Group and our own views. ● We assessed the historical accuracy of forecasts prepared by management by comparing the actual results for the year with the original forecasts. ● We involved KPMG valuation specialists that assessed the technical accuracy of the calculations and compared the assumptions used to market and indus- try information. ● Furthermore, we considered the appropriateness of the Group’s disclosures in respect of goodwill and impairment testing. Changes in Group structure and their accounting treatment (refer to notes 26 Acquired business operations, 27 Assets held for sale, 28 Subsidiaries and material non-controlling interests and 31 Related party transactions in the consolidated financial statements) ● Several changes have taken place in the Group structure in the financial year ended due to business combinations and share pur- chases of non-controlling interests. In addition, dental health services have been classified as assets held for sale in the consoli- dated financial statements. ● In business combinations, the assets and liabilities of the acquiree are measured at fair value at the date of the acquisition. Ar- rangements may also involve contingent considerations which are measured at fair value at each reporting date. Their determina- tion requires management to make estimates. Also classification and valuation of assets held for sale require management judge- ment. ● The accounting entries recorded resulting from the changes in the Group structure are considered a key audit matter due to man- agement judgement relating to the entries and valuation matters among other things. ● For business combinations we considered the purchase agreements, evalu- ated the valuation principles of the assets and liabilities of the acquiree and the underlying assumptions used, as well as assessed the technical accu- racy of the purchase price allocations. We also assessed the existence of in- tangible assets based on the transferred business and goodwill generated in the acquisition. ● Our audit procedures also included assessing fair values of any additional or contingent considerations for business combinations made in the cur- rent and previous financial years. ● We involved KPMG valuation specialists that assessed as applicable the ap- propriateness of the valuation principles applied. ● Regarding assets held for sale and related liabilities we have assessed the appropriateness of the classification and valuations aspects. ● Furthermore, we considered the appropriateness of the Group’s disclo- sures in respect of the changes in the Group structure. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 84 Responsibilities of the Board of Directors and the Managing Director for the Financial State- ments The Board of Directors and the Managing Director are responsible for the preparation of consolidated finan- cial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, and of financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of financial statements in Finland and comply with statutory requirements. The Board of Directors and the Managing Director are also responsible for such internal con- trol as they determine is necessary to enable the preparation of financial statements that are free from ma- terial misstatement, whether due to fraud or error. In preparing the financial statements, the Board of Directors and the Managing Director are responsible for assessing the parent company’s and the group’s ability to continue as a going concern, disclosing, as ap- plicable, matters relating to going concern and using the going concern basis of accounting. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liqui- date the parent company or the group or cease operations, or there is no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that in- cludes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with good auditing practice will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the ag- gregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ● Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstate- ment resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, for- gery, intentional omissions, misrepresentations, or the override of internal control. ● Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effective- ness of the parent company’s or the group’s internal control. ● Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ● Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the parent company’s or the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evi- dence obtained up to the date of our auditor’s report. However, future events or conditions may cause the parent company or the group to cease to continue as a going concern. ● Evaluate the overall presentation, structure and content of the financial statements, including the disclo- sures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view. ● Obtain sufficient appropriate audit evidence regarding the financial information of the entities or busi- ness activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsi- ble for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other mat- ters that may reasonably be thought to bear on our independence, and where applicable, related safe- guards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes pub- lic disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 85 Other Reporting Requirements Information on our audit engagement We were first appointed as auditors by the Annual General Meeting when Pihlajalinna Plc was established on 15 April 2014 and our appointment represents a total period of uninterrupted engagement of eight years. In Pihlajalinna Terveys Oy we were first appointed as auditors for the financial year ended 31 Decem- ber 2010. Pihlajalinna Plc became a public interest entity on 8 June 2015. We have been the company’s au- ditors since it became a public interest entity. Other Information The Board of Directors and the Managing Director are responsible for the other information. The other in- formation comprises the report of the Board of Directors and the information included in the Annual Re- port, but does not include the financial statements and our auditor’s report thereon. We have obtained the report of the Board of Directors prior to the date of this auditor’s report, and the Annual Report is expected to be made available to us after that date. Our opinion on the financial statements does not cover the other information. In connection with our audit of the financial statements, our responsibility is to read the other infor- mation identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the report of the Board of Directors, our responsibility also includes considering whether the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. In our opinion, the information in the report of the Board of Directors is consistent with the information in the financial statements and the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Tampere 20 February 2023 KPMG OY AB Lotta Nurminen Authorised Public Accountant, KHT Independent Auditor’s Reasonable Assurance Report on Pihlajalinna Plc’s ESEF Financial Statements To the Board of Directors of Pihlajalinna Plc We have undertaken a reasonable assurance engagement in respect of whether the consolidated financial statements for the year ended 31 December, 2022 included in the digital financial statements 74370058MTRLEDOCHV67-2022-12-31-en.zip of Pihlajalinna Plc (Business ID 2617455-1) have been marked up with iXBRL markups in accordance with the requirements of Article 4 of EU Delegated Regulation 2018/815 (ESEF RTS). The Responsibility of the Board of Directors and Managing Director The Board of Directors and Managing Director are responsible for preparing the report of the Board of Direc- tors and financial statements (ESEF financial statements) that comply with the requirements of ESEF RTS. This responsibility includes: ● preparation of ESEF financial statements in XHTML format in accordance with Article 3 of the ESEF RTS ● marking up the primary statements and the notes to the consolidated financial statements, and the company identification data included in the ESEF financial statements with iXBRL tags in ac- cordance with Article 4 of the ESEF RTS; and ● ensuring consistency between ESEF financial statements and audited financial statements. The Board of Directors and the Managing Director are also responsible for such internal control as they deem necessary to prepare the ESEF financial statements in accordance with the requirements of the ESEF RTS. Auditor’s Independence and Quality Management We are independent of the company in accordance with the ethical requirements applicable in Finland, which apply to the engagement we have performed, and we have fulfilled our other ethical responsibilities in ac- cordance with these requirements. The auditor applies International Standard on Quality Management ISQM 1, which requires the firm to design, implement and operate a system of quality management including policies or procedures regarding compli- ance with ethical requirements, professional standards and applicable legal and regulations requirements. Auditor’s Responsibility In accordance with the Engagement Letter our responsibility is to express an opinion on whether the marking up of the consolidated financial statements included in the ESEF financial statements comply in all material respects with the Article 4 of the ESEF RTS. We conducted our reasonable assurance engagement in accord- ance with International Standard on Assurance Engagements 3000 . The engagement involves procedures to obtain evidence whether; REPORT BY THE BOARD OF DIRECTORS | FINANCIAL STATEMENTS 86 ● the primary statements of the consolidated financial statements included in the ESEF financial statements are, in all material respects, marked up with iXBRL tags in accordance with Article 4 of the ESEF RTS, and; ● whether the notes to the consolidated financial statements and the company identification data included in the ESEF financial statements data, have been marked up, in all material respects, with iXBRL tags in accordance with Article 4 of the ESEF RTS; and ● whether the ESEF financial statements and the audited financial statements are consistent with each other. The nature, timing and the extent of procedures selected depend on practitioner’s judgement. This includes the assessment of the risks of material departures from the requirements set out in the ESEF RTS, whether due to fraud or error. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the primary statements of the consolidated financial statements, the notes to the consolidated financial statements and the company identification data included in the ESEF financial statements of Pihla- jalinna Plc identified as 74370058MTRLEDOCHV67-2022-12-31-en.zip for the year ended 31 December, 2022 are, in all material respects, marked up in compliance with the ESEF Regulatory Technical Standard. Our audit opinion on the audit of the consolidated financial statements of Pihlajalinna Plc for the year ended 31 December, 2022 is set out in our Auditor’s Report dated 20 February, 2023. In this report, we do not ex- press any audit opinion or other assurance conclusion on the consolidated financial statements. Tampere 10 March, 2023 KPMG OY AB Lotta Nurminen Authorised Public Accountant, KHT