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Note 8 Net financial items
Accounting principles
Net financial items comprise of net interest expenses, foreign exchange gains and losses and other financial income and expenses mainly arising from interest-bearing assets and liabilities.
Financial income and expense
Year Ended 31 December
EUR million 2016 2015
Net Financial Expense in the Income Statement
Financial income 44 25
Financial expense -286 -270
Total -242 -245
Represented by
Interest expense
Borrowings -163 -189
Net interest from interest rate derivatives 1 -7
Finance leases -1 -2
Interest capitalised 12 12
Interest income on loans and receivables 10 18
Net interest on net defined benefit liabilities -7 -9
Exchange gains and losses
Currency derivatives 30 1
Borrowings and deposits -73 -44
Other financial income 3 5
Other financial expense
Fair value hedges - -1
Other fair value changes -4 1
Others -50 -30
Total -242 -245
Gains and losses on derivative financial instruments are shown in Note 27 Derivatives.
In 2016, the net interest expense on borrowings decreased due to a lower and further improved debt portfolio. The amount of borrowing costs capitalised during the year amounted to EUR 12 (EUR 12) million. In 2016, these are mainly related to the Beihai Mill project in Guangxi, China which commenced production during the second quarter of 2016. The average interest rate used for capitalisation was 4.5% (4.9%). Costs on long-term debt issues capitalised as part of non-current debt amounted to EUR 25 (EUR 32) million in the Statement of Financial Position. During the year EUR 8 (EUR 7) million was amortised through interest expense by using the effective interest rate method.

Exchange gains and losses for currency derivatives mainly relate to non-hedge accounted instruments fair valued through the Income Statement as well as time value of options under hedge accounting.

The other fair value changes included under other financial expenses are mainly related to the change in the fair value of interest rate derivatives not under hedge accounting. At the end of 2016, the group did not have any non-hedge accounted interest-rate derivatives outstanding.
In 2016 the group recorded a net expense of EUR 34 (EUR 20) million due to repurchases of bond notes with the impact being under other financial expense. The transactions are explained in more detail in Note 26 Debt. During 2015, the group closed majority of its non-hedge accounted interest rate swaps and all of its non-hedge accounted interest rate options and interest rate collars. The net impact of the closures on Income Statement amounted to nil. The net cash paid of EUR 38 million excluding accrued interest to settle the derivative liabilities are presented for 2015 period in the other financial items section of the Cash Flow Statement.

During 2015, Pohjolan Voima Oy (PVO) related shareholder loans to finance the Olkiluoto 4 (OL4) project were written off as a result of TVO’s General Meeting’s decision not to apply for a construction licence for the Olkiluoto 4 nuclear power plant. The write-off of the loan receivables had a negative impact of EUR 5 million that is shown in other financial expense on others line for the year 2015.

The rest of the amount reported under other financial expense mainly relates to net financial fees for unused committed credit facilities, guarantees and rating agencies.
Total foreign exchange gains and losses in the income statement excluding hedges
Year Ended 31 December
EUR million 2016 2015
Sales 4 64
Costs and expenses -7 -13
Borrowings and deposits -73 -44
Total -76 7

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