NNPC Limited Finance and Accounts Procedures PDF

NNPC Limited Finance and Accounts Process and Procedures NNPC LIMITED FINANCE AND ACCOUNTS PROCESS AND PROCEDURES NNPC Limited January 2023 NNPC Limited Finance and Accounts Process and Procedures Document Review, Check, Endorsement & Approval Issue 1 Signature Name Position Date Issue, Modif...

NNPC Limited Finance and Accounts Process and Procedures NNPC LIMITED FINANCE AND ACCOUNTS PROCESS AND PROCEDURES NNPC Limited January 2023 NNPC Limited Finance and Accounts Process and Procedures Document Review, Check, Endorsement & Approval Issue 1 Signature Name Position Date Issue, Modification PIA Implementati on Team CFO SLT SMT 19/01/2023 19/01/2023 19/01/2023 19/01/2023 Prepared Checked Endorsed Approved 2 NNPC Limited Finance and Accounts Process and Procedures Table of Contents 1.0 1.1 Budgeting and Planning............................................................................................................. 11 Policy Objectives .............................................................................................................................. 11 1.2 Scope/Applicability ......................................................................................................................... 11 1.3 Policy Statements ........................................................................................................................... 11 1.4 Procedural Guidelines for Budgeting .............................................................................. 12 1.5 Compliance ......................................................................................................................................... 17 1.6 References ........................................................................................................................................... 17 2.0 Accounts Payable ............................................................................................................................ 18 2.1 Objectives............................................................................................................................................. 18 2.2 Scope/Applicability ........................................................................................................................ 18 2.3 Policy Statements .......................................................................................................................... 18 2.4 Procedural Guidelines ................................................................................................................. 19 2.5 Compliance ........................................................................................................................................ 22 2.6 References .......................................................................................................................................... 23 3.0 Trade Credit and Accounts Receivable ........................................................................... 24 3.1 Objectives............................................................................................................................................ 24 3.2 Scope/Applicability ....................................................................................................................... 24 3.3 Policy Statements ......................................................................................................................... 24 3.4 Procedural Guidelines ................................................................................................................ 26 3.5 Compliance ........................................................................................................................................ 33 3.6 References .......................................................................................................................................... 34 4.0 Imprest Management ................................................................................................................. 35 4.1 Objective .............................................................................................................................................. 35 4.2 Scope and Applicability ............................................................................................................. 35 4.3 Policy Statements ......................................................................................................................... 35 4.4 Procedural Guidelines of Imprest Management .................................................... 36 4.5 Compliance ........................................................................................................................................ 39 4.6 References .......................................................................................................................................... 39 5.0 Common Cost Management .................................................................................................. 41 3 NNPC Limited Finance and Accounts Process and Procedures 5.1 Objectives............................................................................................................................................. 41 5.2 Scope/Applicability ........................................................................................................................ 41 5.3 Policy Statements .......................................................................................................................... 41 5.4 Procedural Guidelines for Overhead Cost Management.................................. 42 5.5 Compliance ........................................................................................................................................ 47 5.6 References .......................................................................................................................................... 47 6.0 Property Plant and Equipment Management ..........................................................49 6.1 Objectives............................................................................................................................................49 6.2 Scope/Applicability .......................................................................................................................49 6.3 Property, Plant and Equipment Policy Statements .............................................49 6.4 Procedural Guidelines for PP&E Management ........................................................ 50 6.5 Compliance ......................................................................................................................................... 61 6.6 References ........................................................................................................................................... 61 7.0 Inventory Management ............................................................................................................. 63 7.1 Objective .............................................................................................................................................. 63 7.2 Scope/Applicability ....................................................................................................................... 63 7.3 Policy Statements ......................................................................................................................... 63 7.4 Procedural Guidelines ................................................................................................................64 7.5 Compliance ........................................................................................................................................ 70 7.6 References .......................................................................................................................................... 70 8.0 Project Accounting........................................................................................................................ 72 8.1 Objectives............................................................................................................................................ 72 8.2 Scope/Applicability ....................................................................................................................... 72 8.3 Policy Statement............................................................................................................................ 72 8.4 Procedural Guidelines on Project Accounting ......................................................... 73 8.5 Additional Information .............................................................................................................. 78 8.6 References .......................................................................................................................................... 78 9.0 Financial Reporting ...................................................................................................................... 80 9.1 Objectives........................................................................................................................................... 80 9.2 Scope/Applicability ...................................................................................................................... 80 9.3 Policy Statements ........................................................................................................................ 80 4 NNPC Limited Finance and Accounts Process and Procedures 9.4 Procedural Guidelines ................................................................................................................. 81 9.5 Compliance ........................................................................................................................................90 9.6 References ........................................................................................................................................... 91 10.0 Intercompany Loans Management ................................................................................... 93 10.1 Objectives ....................................................................................................................................... 93 10.2 Scope/Applicability .................................................................................................................. 93 10.3 Intercompany Loan Policy Statement....................................................................... 93 10.4 Procedural Guidelines ...........................................................................................................94 10.5 Compliance ................................................................................................................................... 98 10.6 Disclosure Requirements....................................................................................................98 10.7 References ..................................................................................................................................... 99 11.0 Investment Management.......................................................................................................100 11.1 Objectives .....................................................................................................................................100 11.2 Scope/Applicability ................................................................................................................100 11.3 Surplus Funds and Investment Management Policy Statements ......100 11.4 Procedural Guidelines ......................................................................................................... 102 11.5 Compliance ................................................................................................................................. 107 11.6 References ................................................................................................................................... 108 12.0 Dividends Policy ............................................................................................................................ 109 12.1 Objectives ..................................................................................................................................... 109 12.2 Scope/Applicability ................................................................................................................ 109 12.3 Dividend Policy Statement .............................................................................................. 109 12.4 Procedural Guidelines .......................................................................................................... 110 12.5 Compliance .................................................................................................................................. 114 12.6 Disclosure Requirements................................................................................................... 114 12.7 References .................................................................................................................................... 115 13.0 Foreign Exchange Management ....................................................................................... 116 13.1 Objectives ...................................................................................................................................... 116 13.2 Scope/Applicability ................................................................................................................. 116 13.3 Sources of Foreign Exchange ......................................................................................... 116 13.4 Foreign Exchange Exposure Management Policy Statement................ 117 5 NNPC Limited Finance and Accounts Process and Procedures 13.5 Procedural Guidelines .......................................................................................................... 119 13.6 Compliance ................................................................................................................................. 124 13.7 Disclosure Requirements.................................................................................................. 124 13.8 References ................................................................................................................................... 125 14.0 Joint Interest Management (Operated Assets) ....................................................... 126 14.1 Objectives ..................................................................................................................................... 126 14.2 Scope/Applicability ................................................................................................................ 126 14.3 Policy Statements................................................................................................................... 126 14.4 Procedural Guidelines for JV Management......................................................... 127 14.5 Compliance ................................................................................................................................. 134 14.6 References ....................................................................................................................................135 15.0 Joint Interest Management (Non-operated Assets) ............................................ 136 15.1 Objectives ..................................................................................................................................... 136 15.2 Scope/Applicability ................................................................................................................ 136 15.3 Policy Statements................................................................................................................... 136 15.4 Procedural Guidelines for JV Management......................................................... 137 15.5 Compliance ................................................................................................................................. 142 15.6 References ................................................................................................................................... 142 16.0 Production Sharing Contracts and Service Contracts .......................................144 16.1 Objectives .....................................................................................................................................144 16.2 Scope/Applicability ................................................................................................................144 16.3 Policy Statement .....................................................................................................................144 16.4 Procedural Guidelines .........................................................................................................144 16.5 Compliance ................................................................................................................................. 150 16.6 References ................................................................................................................................... 150 17.0 Banking Counterparty Selection and Credit Acceptance Policy................. 151 17.1 Objectives ...................................................................................................................................... 151 17.2 Scope/Applicability ................................................................................................................. 151 17.3 Banking Relationship Policy Statements ............................................................... 151 17.4 Procedural Guidelines ......................................................................................................... 152 17.5 Compliance ................................................................................................................................. 162 6 NNPC Limited Finance and Accounts Process and Procedures 17.6 References ................................................................................................................................... 162 18.0 Tax and Other Statutory Remittances ........................................................................... 163 18.1 Objectives ..................................................................................................................................... 163 18.2 Scope/Applicability ................................................................................................................ 163 18.3 Policy Statements................................................................................................................... 164 18.4 Procedures .................................................................................................................................. 185 18.5 Compliance ................................................................................................................................. 195 18.6 References ................................................................................................................................... 195 Appendices ................................................................................................................................................ 196 7 NNPC Limited Finance and Accounts Process and Procedures Glossary of Terms Term/ Abbreviation Meaning ADC Asset Disposal Committee AFE Authority for Expenditure AGM Annual General Meeting APU Accounts Payables Unit AUC Assets Under Construction AVT Asset Verification Team BG Bank Guarantee BOL Bill of Lading BVAR Budget Variance Analysis Report CABDC Corporate Assets Boarding and Disposal Committee CAP Cost Allocation Plan CAPEX Capital Expenditure CEO Chief Executive Officer CFaR Cashflow at Risk CGT Capital Gains Tax CHQ Corporate Headquarters CIT Companies Income Tax CITA Companies Income Tax Act COA Chart of Accounts CUP Comparable Uncontrolled Price DCA Debt Collection Agency DFA Delegation of Financial Authority DOA Delegation of Authority DSDP Direct Sales Direct Direct Purchase 8 NNPC Limited Finance and Accounts Process and Procedures EaR Earnings at Risk EGM Extraordinary General Meeting ERM Enterprise Risk Management ERP Enterprise resource Planning FGN Federal Government of Nigeria FINCOM Finance Committee FIRS Federal Inland Revenue Services FX Foreign Exchange HCT Hydrocarbon Tax HOD Head of Department IAS International Accounting Standards IFRS International Financial Reporting Standards IMMFA Institutional Money Market Funds Association ITF Industrial Training Fund JEM Joint Entitlement Model JOA Joint Operating Arrangement JV Joint Ventures LC Letter of Credit MACOM Management Committee MD Managing Director MPR Monetary Policy Rate MTR Material Transfer Request NAPIMS National Petroleum Investment Management Services NDDC Niger Delta Development Commission NHF National Housing Development Fund NOR Notice of Readiness NSITF National Social Insurance Trust Fund 9 NNPC Limited Finance and Accounts Process and Procedures OML Oil Mining Lease OPCOM Operating Committee OPEX Operating Expenditure OPL Oil Prospecting License PAYE Pay As You Earn PB Performance Bond PCG Parent Company Guarantee PIA Petroleum Industry Act PMT Project Management Team PPE Property Plant and Equipment PPT Petroleum Profits Tax PSC Production Sharing Contract SBU Strategic Business Unit SC Service Contract SIRS State Internal Revenue Service SLA Service Level Agreement SCM Supply Chain Management SOFR Secured Overnight Financing Rate SUBCOM Sub-Committee TECOM Technical Committee UAP Uniform Accounting Procedures VAT Value Added Tax WBS Work Breakdown Structure WHT Withholding Tax 10 NNPC Limited Finance and Accounts Process and Procedures 1.0 Budgeting and Planning 1.1 Policy Objectives This policy section covers all activities involved in planning, developing, implementing, and monitoring of the capital and operating budgets of the NNPC Limited and its subsidiaries. The processes under Budgeting are designed to ensure:  Alignment of annual budgets to the financial and strategic objectives of NNPC Limited and its Subsidiaries;  Standardised procedures for budget preparation, review and update;  Adequate review of budget assumptions prior to the preparation of the budget;  Adequate approval of budgets in line with the DOA/DFA authority limits;  Adequate procedures for monitoring and evaluating budget performance. 1.2 Scope/Applicability The sub-processes covered under this section include: 1.3  Budget planning, preparation, and approval  Budget monitoring and reporting  Budget revision Policy Statements  The annual budget of NNPC Limited and its Subsidiaries shall be prepared to reflect the approved strategic plans of NNPC Limited. 11 NNPC Limited Finance and Accounts Process and Procedures  The annual budget period for NNPC Limited and its Subsidiaries shall run from the period 1st January to 31st December of every year.  The budget cycle for a financial year shall be implemented in line with NNPC Limited’s approved budget timetable.  Approvals for Budget Commitments shall be made in line with the NNPC Delegation of Authority DOA/DFA Guidelines. 1.4 Procedural Guidelines for Budgeting 1.4.1 Budget Planning, Preparation and Approval  NNPC Limited and its subsidiaries budget shall be prepared on an annual basis and derived from the three to five-year strategic business plan of the Company.  The annual budget shall be divided into three sections: revenue budget, capital expenditure (CAPEX) budget, and operating expenditure (OPEX) budget.  NNPC’s revenue streams are mainly classified into:  Core revenue: sales of crude oil and gas, refined products and rendering of technical services  Finance income: Fixed income investments, dividend income and rental income  Miscellaneous income: Disposal of asset, Registration fees, Bulk Purchase Agreement (BPA) and other third-party fees.  CAPEX shall consist of acquisition of movable and non-movable fixed assets, and execution of capital projects, while OPEX primarily consists of all operational expenses for the day to day running of the business – 12 NNPC Limited Finance and Accounts Process and Procedures both direct and indirect expenditures (salaries, benefits, and overheads).  Each budget base shall be based on the budget driver(s) driving such base, and each budget center/business unit/department shall be responsible for the budget.  The annual budget shall:  Identify each capital activity in sufficient detail to provide easy identification of the nature, scope, duration, and impact of the activity, together with appropriate justification.  Include such reasonable information regarding personnel and estimated manpower costs.  Include an estimate of expenditure by calendar month.  Include projected cash flows and net profit projections by month; and  Be accompanied by other information necessary for an informed board decision.  The process of preparing the annual budget shall commence not later than the first week in August of the preceding year of the budget and shall be completed latest by the last week in November every year. All units and Budget Centres must align their budget work program to fit into the overall budget timetable in order to ensure timely completion of the budget process. (See budget timetable in Appendix 1).  Each Departmental Head shall be responsible for the preparation of the budget for their respective budget center, including any proposed projects within the budget centre. The Departmental Heads shall be 13 NNPC Limited Finance and Accounts Process and Procedures responsible for presenting their budget to the Senior Management Team for deliberations.  All Budget Centre Managers/Head of Departments shall be expected to have sufficient level of financial literacy and will ensure they develop and maintain their financial competency. This includes understanding the fundamental financial concepts of accruals, commitments, income, operating expenditure, capital expenditure, delegations, and the impact of their actions on the financial statements.  The Budget Department shall be responsible for consolidating all budgets from the various budget centers into a single budget for each subsidiary/business units or its equivalent.  The Budget Department shall conduct budget review sessions with the members of each of the business units to challenge and agree the departmental expenditure estimates, assumptions, and alignment with the NNPC Limited’s corporate objectives.  NNPC Limited’s budget shall be approved by the Board of Directors while respective subsidiaries budgets shall be pre-approved by NNPC Limited’s Board of Directors and subsequently approved by the Subsidiary Board in line with the provisions of the approved Delegation of Authority (DOA) and Delegation of Financial Authority (DFA) limits.  All entities shall upload their approved Budget into the financial system at Budget owners’ level (Departments Budget for CHQ & Divisional Budgets for SBUs/CSUs) not later than two (2) weeks after the release of the Budget.  For self-funding entities, budgeted funds shall be released by the Finance and Accounts Departments of such entities. For NNPC Limited funded entities, the budgeted funds shall be released by NNPC Limited 14 NNPC Limited Finance and Accounts Process and Procedures to the respective entities at the beginning of the budget period. The Finance and Accounts Departments of such entities shall be responsible for the subsequent release of funds with strict compliance with the approved budget.  The heads of the budgeting and planning department of each business unit shall be responsible for monitoring to ensure that revenue targets are met and there are no expenditure overruns.  In event of unavoidable delay in budget approval, the CEO may approve an interim budget which may be a percentage of the previous year budget (CAPEX and OPEX).  Budget Owners (N to N-4 level) shall set the work plan and provide the resources and budget to execute the activities.  Budget Holders at divisional/departmental levels shall manage the performance of all activities as agreed, to realize the intended strategic plan including the realization of opportunities and risk mitigation.  Activity Owners/Primary Spenders shall be responsible to the Budget Holders for managing the budget within assigned spending limits and ensuring the realisation of opportunities and mitigation of risk. 1.4.2 Budget Monitoring and Reporting  All commitments (e.g., purchase orders, expenditure request) shall be budget cleared before they are initiated to ensure costs are effectively monitored in line with the approved budget. The relevant budget balance shall be reduced by the amount of expenditure item about to be incurred.  Budget Center Managers are responsible for reporting actual performance against their approved budgets on a monthly basis. They 15 NNPC Limited Finance and Accounts Process and Procedures shall be responsible for the periodic review of their functional budgets to ensure budget overruns are minimized and avoided.  A Budget Variance Analysis Report (BVAR) shall be prepared monthly by each budget center manager and forwarded to the Budgeting and Planning Department. The report shall contain an analysis of actual to budgeted spend and provide explanations for significant variances.  Budget performance shall be assessed on a quarterly basis with consideration to all monthly BVAR in each quarter.  A budget overrun may arise in the unlikely event of a contingency. This may be charged to the contingency fund. Requests to charge unbudgeted expenditure to the Contingency Fund shall be accommodated only for critical reasons and this shall be made through the Budget Department and approved in line with the DOA/DFA limits.  Unutilised budgeted funds for a specified period shall not be rolled over to the next financial year. Consequently, approved budgetary items with valid documentations shall be budget cleared and accrued for before the end of the financial year. 1.4.3 Budget Revision  Budget revisions shall be performed twice a year (May and October). A budget reforecast session shall be held between the Budget Department and management of the respective department/business units to reappraise budget estimates based on the analysis of the actual to budget spend for preceding months.  Other situations may arise where the budget would be revised. The related unit (championed by the Head, Budget Department) shall 16 NNPC Limited Finance and Accounts Process and Procedures establish justification for the budget revision in light of actual year-todate performances and future budget estimates.  All budget revisions shall be approved in line with the DOA/DFA limits for budget approval.  NNPC Limited and its Subsidiaries budgets shall not be revised on the following grounds:  Reallocation from CAPEX to OPEX and vice versa  Reallocation from direct OPEX to indirect OPEX and vice versa  Reallocation of OPEX or CAPEX budget from one business unit/department to another.  Approved revised budgets shall be uploaded into the ERP by the respective entities. 1.5 Compliance The Governance, Risk and Compliance (“GRC”) team shall perform a biennial review of the execution of this Policy for compliance and report any infringement to the Board of Directors. Where the need arises, the GCEO is authorized to grant exceptions to the application of this policy, and thereafter seek ratification from the NNPC Limited Board. 1.6 References The approved strategic plan and the DOA/DFA guidelines for NNPC Limited and its Subsidiaries are integral to this policy document. 17 NNPC Limited Finance and Accounts Process and Procedures 2.0 Accounts Payable 2.1 Objectives This policy sets out the guidelines for effective management of vendor invoices, maintaining accurate data, and fostering improved relationships with vendors and other third parties. The processes under this section are designed to ensure:  Maximization of payment accuracy and control;  Standard procedures for processing of invoices in line with cash flow forecasts to mitigate potential funding gaps;  Complete and accurate classification and recording of the liabilities to third parties in the financial statements;  2.2 Improving business relationship with third party vendors. Scope/Applicability This Policy covers the following scope, and is applicable to NNPC Limited and its subsidiaries: 2.3  Invoice processing  Advance payment to contractors  Accounts payable reconciliation and reporting Policy Statements It is the policy of NNPC Limited and its Subsidiaries to pay suppliers within company standard payment term, as may be set by Management from time to time (currently within 45 days from the date of receipt of a valid invoice from a supplier). Any proposal to adopt a payment term other than “Net 45” in a third party or related party contract must be approved by the Chief Financial Officer (CFO) for NNPC Limited, or the Managing Director for Subsidiaries; upon the recommendation of the Treasurer of NNPC 18 NNPC Limited Finance and Accounts Process and Procedures Limited or Head of Finance of the Subsidiary respectively, before contract execution. Where a supplier requests for an advance payment for the supply of goods or services, financial instruments such as bank guarantees, performance bonds or letters of credit from a bank that meets the minimum credit rating threshold for credit acceptances may be requested from the supplier. 2.4 Procedural Guidelines 2.4.1 Invoice Processing Responsibilities The invoice processing function shall rest with the Accounts Payable Unit (APU) or its equivalent within the Finance Department of the NNPC Limited and its Subsidiaries The responsibilities of the APU shall include:  Maintaining complete and accurate records of financial obligations to third parties through proper capturing of invoices and accruals in line with the Group’s accounting policies;  Performing a three (3) way match on purchase orders, goods receipt/ service delivery notes and invoices;  Prioritizing invoices according to early payment discount potential and payment terms;  Reconciling vendor statements to ledger balances, correcting discrepancies, and responding to all vendor inquiries;  Computing and accounting for all statutory deductions on vendor payments; and  Month-end closing by reconciling vendor accounts to the general ledger and preparing aging analysis reports on accounts payables. 2.4.2 Invoice Processing Guidelines  The finance function of NNPC Limited shall maintain adequate segregation of duties with regards to accounts payable. The 19 NNPC Limited Finance and Accounts Process and Procedures matching/processing of invoices and the payment of invoices shall not be performed by the same unit or individual.  The APU shall be obliged to process invoices for vendor payments upon satisfaction of all contractual terms in the delivery of goods and services irrespective of the time the invoice is submitted by the vendor.  Delivery of goods and services shall be certified by representatives of the user department/business unit and the procurement department.  Only Invoices that are properly approved in accordance with the approved Delegation of Authority Policy shall be eligible for processing.  Invoices shall only be considered for processing when addressed to NNPC Limited or any of its Subsidiaries. APU shall not process invoices from vendors that are not SAP registered.  The APU shall ensure that all invoice processing activities such as invoice capture, validation and forwarding for payment processing are concluded within 5 days of invoice receipt.  Invoices shall be captured in reference to the SAP generated purchase order number used to initiate the requisition of goods or services.  The APU shall ensure that all copies of invoices and other third-party documents are properly archived for reference purpose. 2.4.3 Guidelines for Advance Payment to Contractors  All advance payments to third parties shall be backed by a valid bank guarantee, performance bond or letters of credit obtained from a qualifying bank, as prescribed in the Banking Counterparty Selection and Credit Acceptance Policy. 20 NNPC Limited Finance and Accounts Process and Procedures  Where an advance payment is to be made to a third party without a bank guarantee, performance bond or letters of credit (or where such instrument is from an unapproved bank), the Chief Executive Officer (CEO) can grant a waiver up to the limit of USD2 million on the recommendation of the Chief Financial Officer (CFO).  The cumulative balance of unrecovered advance payments based on such waivers shall not exceed USD6 million at any point in time, failing which the appropriate Tender Committee approval will be required for additional waiver requests as per Delegated Financial Authority (DFA) limit. 2.4.4 Accounts Payable Reconciliation and Reporting NNPC Limited and its Subsidiaries shall apply the following guidelines in reconciling and reporting accounts payable:  The APU shall ensure proper classification of third-party liability and that no offset is carried out for third parties existing as both a customer and vendor.  The APU shall ensure proper computation of relevant taxes as it relates to various services and goods before posting into the ERP.  The APU shall ensure that credit period on invoices is inputted at the point of posting the invoice on the ERP. This is to allow for easy tracking and aging of outstanding invoices.  The APU shall ensure that individual vendor’s ledger is reconciled to the general ledger monthly.  The APU shall ensure that account balances for major vendors in the ERP, correspond to the vendors’ statements. Where there are discrepancies, reconciliations shall be conducted with the affected vendors. Reconciliations with vendors may also be conducted based on vendor request. 21 NNPC Limited Finance and Accounts Process and Procedures  The APU shall on a monthly basis, provide the Head of Finance and Accounts with a report on accounts payable which shall include:  Volume of transactions processed;  Details of taxes such as WHT and VAT on vendor invoices;  Vendors’ balance age analysis;  Significantly overdue account payable balances and the root cause;  Balances in dispute and claims made by suppliers;  Debit balances in vendor accounts; and  Other information as may be required by management.  The APU shall also provide a weekly report of all outstanding invoices with the payment due date. This shall aid proper planning and cash flow forecasting.  All vendor/supplier invoices received, approved, and supported with proper documentation shall be recorded as accounts payable, on or before the fifth working day of the following month.  Proper documentation shall include but not limited to:  Purchase order/ service order  Goods received note  Job completion certificate  Contract agreement/letter of intent 2.5 Compliance Governance, Risk and Compliance (GRC) shall perform a biennial review of the execution of this Policy for compliance and report any infringement to the Board. 22 NNPC Limited Finance and Accounts Process and Procedures Where the need arises, the GCEO is authorized to grant exceptions to the application of this policy, and thereafter seek ratification from the NNPC Limited Board. 2.6 References This policy is an integral part of the NNPC Limited Finance and Accounts Policy Manual. It is complemented by the Group accounting policy. 23 NNPC Limited Finance and Accounts Process and Procedures 3.0 Trade Credit and Accounts Receivable 3.1 Objectives The purpose of this policy is to establish the guidelines for trade credits granting and the management of accounts receivable through accurate and timely billing of customers. The processes under Trade Credit and Management Policy are designed to ensure:  Accounts Receivable The evaluation of the creditworthiness of customers before granting trade credit facilities;  Formulation of credit terms to maximize sales revenue and maintain a reasonably high receivable turnover ratio; 3.2  The cost of investment in receivables is minimized;  Possible bad debt losses are minimized; and  The cost of credit collection is minimized. Scope/Applicability This Policy covers the following:  Credit Management  Customer invoice/billing processing;  Advance payments from customers  Credit and debit notes processing  Accounts receivable reconciliation and reporting;  Debt collection and recovery It is applicable to NNPC Limited and its wholly owned Subsidiaries. 3.3 Policy Statements 24 NNPC Limited Finance and Accounts Process and Procedures  It is the Policy of NNPC Limited and its wholly owned subsidiaries to sell on credit to its Long-Term Customers (Term/Contract Customers) or Spot Customers based on the following criteria:  Credit analysis shall be carried out on each customer to ascertain credit worthiness before advancing any credit facility.  Customer must present a Letter of Credit (LC) or Bank Guarantee (BG) from banks that have a minimum long-term credit rating as specified in the Counterparty Selection and Credit Acceptance Policy.  All issued irrevocable Letters of Credit (LC) or Bank Guarantees (BGs) in favor of NNPC Limited shall cover the maximum foreseeable credit exposure amount for the tenor of the sales contract.  Credit Limits shall be reviewed every twelve (12) months (new accounts; first time after six (6) months) and approved by the Chief Financial Officer (CFO) for NNPC Limited, while the MD shall approve for each wholly owned Subsidiary.  Any request to increase credit limit (out of review cycle) for an account must be justified and signed off by the CFO.  NNPC Limited and its wholly owned Subsidiaries shall charge Penal Interest on defaulting customers in line with the provisions of Section 4.2 of this procedural guide.  The standard collection days for NNPC Limited and its wholly owned Subsidiaries shall be 30 days of the invoice date (Payment term is “Net 30”). However, payment terms may be determined based on events and not the invoice date. For example, invoice will be due no later than 30 days from Bill of Lading (BOL) date or 15 days from Notice of Readiness (NOR) date or 30 days after Constructive Placement date etc. 25 NNPC Limited Finance and Accounts Process and Procedures  Any proposal to adopt a collection term other than “Net 30” in a third party or related party contract must be approved by the Chief Financial Officer (CFO) for NNPC Limited, or the Managing Director for Subsidiaries; upon the recommendation of the Treasurer of NNPC Limited or Head of Finance of the Subsidiary respectively, before contract execution.  Where a debt is approved for write-off, it shall not be communicated to the indebted customer. If the circumstances of a debtor change, further action to recover the debt shall be taken if it is considered financially viable to do so.  Debt written-off involving any customer is not deemed to be debt forgiveness for that customer. Thus, a repository of failed credits and bad debts shall be maintained for future reference. 3.4 Procedural Guidelines Customers of NNPC Limited and its wholly owned subsidiaries have been categorized as follows:  Term/Contract Customers which include:  Commercial/Industrial customers  Power customers  Credit Customers  Cash-and-Carry customers  Export customers  Spot Customers including Direct Sale Direct Purchase (DSDP) 3.4.1 Credit Management NNPC Limited and its wholly owned subsidiaries shall ensure that effective measures are put in place to mitigate the risk of defaulting customers and irrecoverable debts through the use of third party 26 NNPC Limited Finance and Accounts Process and Procedures guarantees and confirmations such as Letters of Credit (LCs) and Bank Guarantees. The following criteria shall apply to Customers that transact with NNPC Limited and its wholly owned subsidiaries:  Credit analysis shall be carried out on each customer to ascertain credit worthiness before advancing any credit facility.  Credits shall be granted to only those customers who provide good credit risk rating. This shall be evaluated using the criteria below among others;  Character: The willingness of the customer to pay  Capacity: The ability of the customer to pay  Condition: The prevailing economic condition  All credit customers shall obtain Letter of Credit (LC) or Bank Guarantee (BG) from banks that have a minimum long-term credit rating as specified in the Counterparty Selection and Credit Acceptance Policy.  All issued irrevocable Letters of Credit (LC) or Bank Guarantees (BGs) in favor of NNPC Limited and its wholly owned subsidiaries shall cover the maximum foreseeable credit exposure amount for the tenor of the sales contract.  Credit Limits shall be reviewed every twelve (12) months (new accounts; first time after six (6) months) and approved by the CFO for NNPC Limited, while the respective MDs shall approve for the wholly owned Subsidiaries.  Any request to increase credit limit (out of review cycle) for an account must be justified and signed off by the CFO for NNPC Limited, or the MD for the respective wholly owned Subsidiary. 27 NNPC Limited Finance and Accounts Process and Procedures  New orders shall not be fulfilled for customers with outstanding debts beyond their contractual credit period or if doing so will result in exposure above their approved credit limit.  Credit Contract (SPAs, GSAs, PPAs, GTAs, etc.) executed with customers shall explicitly state credit terms such as:  Credit limit  Credit period  Default cost/ interest charge rate  Consequences of perpetual default (e.g. product supply cut-off)  Bank Guarantees (BG)  Outstanding debt, interest, and requisite fees must be paid before reinstatement of customer who was cut off. 3.4.2 Penalties for Defaulting Counterparties  All credit sales agreements shall contain penalty clauses for default on payment from the date receivable become due.  Penal interest on outstanding Naira payments shall be charged at Monetary Policy Rate (MPR) subsisting from the date of default or any optimal applicable rate plus a margin, to be determined from time to time by the CFO based on market conditions, upon the recommendation of the Treasurer.  Penal interest for outstanding USD payments shall be a floating base rate of 30-Day Average SOFR (Secured Overnight Financing Rate) plus a fixed margin to be determined from time to time by the CFO based on market conditions upon recommendation of the Treasurer. This provision shall be included in all Sales contract agreements. 3.4.3 Customer Invoice/Billing Processing 28 NNPC Limited Finance and Accounts Process and Procedures The following guidelines shall apply for customer billing operations:  There shall be adequate segregation of duties between preparation and review/approval of internal billing transactions. No billing officer shall be able to create a bill and approve it. Staff who are responsible for the management/collection of receivables must not handle or be responsible for the processing of receipts.  The Billing Unit shall ensure that those responsible for review/approval of internal billing transactions have first-hand knowledge of the transaction being approved, or by review of supporting documentation have adequate understanding of the transaction to verify the validity and appropriateness of the transactions.  Invoices shall be created and billed to the customer within 72 hours after products or services have been provided.  All customer payments on invoices shall be confirmed by the Treasury department.  All customer payments shall be received into designated bank accounts as instructed in the sales agreement.  Where payment is due on a weekend or on a weekday, which is not a banking day in Nigeria or at such other place as may be designated by Seller (NNPC Limited or any of its wholly owned Subsidiaries), payment shall be made on the next banking day by the customer. 3.4.4 Down Payments from Customers  Down payments are payments received from customers before delivery of goods and services purchased. NNPC Limited and its wholly owned Subsidiaries may request down payments from crude oil customers as a form of commitment fee. These commitment fees may be refundable or non-refundable. Crude oil customers may 29 NNPC Limited Finance and Accounts Process and Procedures choose to offset the commitment fees against the initial crude oil lifting invoices.  NNPC Limited and its wholly owned Subsidiaries shall use down payment as a means of minimizing the risk of payment default by new customers. This also helps the cash flow position of NNPC Limited’s business.  The responsibility for managing customers’ down payment shall rest with the Treasurer of NNPC Limited or the Head of Finance and Accounts of the respective wholly owned Subsidiaries. 3.4.5 Credit/Debit Notes Issuance A credit note is a form or letter used by the business to reduce amount receivable from the customer. A credit note may be issued to customers based on invoicing errors, overpayment by customers, product quality complaints and reduction in quantity of product supply (under lift). Debit notes on the other hand are instruments used to increase customers’ liability to the business units. This often arises as a result of over lifting or underpayment. NNPC Limited and its wholly owned Subsidiaries shall apply the following guidelines in managing credit and debit notes:  The Billing Units of NNPC Limited and its respective wholly owned Subsidiaries shall monitor the customers’ positions after each transaction to ascertain the need for credit or debit note commitments. Customers may also notify the Sales/marketing Unit of situations which will require the issuance of credit or debit notes.  Where the notification comes from the customers in writing, the receiving unit (i.e., the unit that originated the initial sales), shall investigate and quality check to validate customers’ complaints and identify the root cause of the issues noted.  All debit and credit note requests shall be approved by the Head Finance and Accounts before issuance to customer. 30 NNPC Limited Finance and Accounts Process and Procedures 3.4.6 Accounts Receivable Reconciliation and Reporting It is the responsibility of Finance and Accounts of NNPC Limited and its wholly owned Subsidiaries to maintain adequate records of all customers’ receivables and ensure that each transaction is reconciled and reviewed individually. This is important for aging, collection, impairment, and write-off of non-recoverable accounts, where necessary. NNPC Limited and its wholly owned Subsidiaries shall apply the following guidelines in reconciling and monitoring accounts receivables:  Finance and Accounts shall reconcile outstanding receivables to the general ledger (GL) monthly on/or before the 10th working day of the subsequent month. Approved reconciliation statements will be maintained and made available on request.  All discrepancies must be investigated and reviewed prior to raising adjusting journals. The Head of Finance and Accounts shall review and approve all reconciling entries before they are posted.  The Reconciliation Unit shall generate an aging schedule for each customer monthly after reconciliation on/or before the 10th working day of the subsequent month. The total of the aging schedule shall be equal to the total accounts receivable recorded and reported. Standard aging brackets used are:  0 – 15 days,  16 – 30 days,  31 – 60 days,  61- 90 days,  91 – 180 days,  181 – 360 days, and  Over 360 days 31 NNPC Limited Finance and Accounts Process and Procedures  A monthly report on trade receivables shall be prepared and distributed as part of the monthly management accounts.  In addition to the aging analysis, the following information shall be included in the report:  Top 10 accounts receivable analysis  Analysis of ledger quality (for example number and value of outstanding receivables, Percentage of each risk class in sales ledger)  Number of follow-ups done  Monthly Accounts Receivable (AR) movements  On an annual basis, the respective Heads of Finance and Accounts of NNPC Limited and its wholly owned Subsidiaries shall subject the accounts receivables balances to impairment test in line with the provisions of IFRS 9. 3.4.7 Debt Collection and Recovery The following guidelines shall apply in the recovery of trade debts by NNPC Limited and its wholly owned Subsidiaries:  Finance and Accounts shall be responsible for overseeing the debt management functions.  Outstanding debts will be reviewed on a monthly basis by the Head of Finance and Accounts and decisions shall be made as to the most appropriate debt recovery action.  Some of the actions that may be undertaken by Finance and Accounts shall include;  Issuance of regular reminders to debt customers  Personal contacts with debt customers  Suspension of further business transactions with debt customers until outstanding positions are cleared 32 NNPC Limited Finance and Accounts Process and Procedures  Referral of debt collection responsibility to debt recovery agents.  Evidence of collection efforts by Finance and Accounts shall be adequately documented.  Where final notifications and warmings have been issued to the debt customers, an approved Debt Collection Agency (DCA) may be engaged for recovery actions. However, this option shall be properly evaluated and selected only if it is economically justified (the cost of engaging the DCA is far less than the benefits) else, the debt shall be considered by Senior management for write off.  Before a debt is deemed irrecoverable, one or more of the following conditions shall be satisfied:  There is little or no economic value to finalize recovery action due to the relatively small value of the debt;  The circumstances of a specified debt customers (bankruptcy, liquidation, customer physical incapacitation etc.) at the period of recovery precludes the customer from making good on the debts.  The debtor cannot be located;  Legal proceedings through the courts have proved, or on legal advice or advice from Debt Collection Agency, would prove unsuccessful. On no account shall a debt customer be informed that an outstanding debt has been written off. If the circumstances of a debtor change, then further action to recover the debt shall be taken if it is considered financially viable to do so. 3.5 Compliance Governance, Risk and Compliance (GRC) shall perform a biennial review of the execution of this Policy for compliance and report any infringement to the Board. 33 NNPC Limited Finance and Accounts Process and Procedures Where the need arises, the GCEO is authorized to grant exceptions to the application of this policy, and thereafter seek ratification from the NNPC Limited Board. 3.6 References This policy is an integral part of the NNPC Limited Finance and Accounts Policy Manual. It is complemented by the Procedural Guide on Banking Counterparty Selection and Credit Acceptances Policy and the Group accounting policy. 34 NNPC Limited Finance and Accounts Process and Procedures 4.0 Imprest Management 4.1 Objective This policy document provides a guideline for the management of NNPC Limited and its Subsidiaries’ imprest funds. The processes under this policy are designed to ensure:  Imprest funds are managed in line with the purpose for which it was collected.  Clear guidelines for the operation of the p-cards. 4.2 Scope and Applicability The policy covers the following sub-sessions and shall be applicable to NNPC Limited and its subsidiaries:  Imprest fund requisition  Imprest fund reconciliation and replenishment 4.3 Policy Statements  The Chief Financial Officer (CFO) shall approve imprest funds for NNPC Limited; while the Managing Directors shall approve imprest funds for each Subsidiary, based on justifiable business needs.  Imprest funds shall be administered via Procurement Card (PCard) and shall NOT be utilised for the following purpose:  Loans to staff  Personal commitments  Travel allowances  Reimbursement of travel expenses  Procurement of asset items  Expenditures for non-office operations related items 35 NNPC Limited Finance and Accounts Process and Procedures  Any other expenditure which is not necessary, reasonable and for which a clear business/operational purpose does not exist.  Imprest funds reconciliation and expense retirements shall be carried on a monthly basis.  All imprest funds in NNPC Limited and its subsidiaries shall be subject to periodic audit by the GRC function. 4.4 Procedural Guidelines of Imprest Management 4.1 Imprest Requisition – Payment Cards Operation  The imprest shall be applicable for unplanned business expenditure that requires immediate purchase. It shall also be used for transactions that may not be feasible to process through subsisting procurement arrangements.  Imprest funds will also be approved in limited situations when maintaining a cash-on-hand balance is clearly the most effective payment option.  Imprest accounts shall be operated using assigned operational debit cards known as Payment Cards (P-cards).  Naira P-cards shall be assigned to all need departments. Only specific departments/divisions that require a dollarized P-cards such as SCM, Human Resources Department shall be assigned a dollarized P-card.  Example of payments to be made using a dollarized P-card include payments for:   Subscriptions such as LinkedIn, system licenses etc.  Online foreign training courses for eligible staff  Foreign services for which only card payments are accepted Custody of the debit card shall reside with a designated secretary/admin staff within the department/division. The card shall 36 NNPC Limited Finance and Accounts Process and Procedures not be released for any transaction to members of staff unless due approval has been obtained. The custodian of the card shall ensure that no cash is withdrawn unless an approved need arises.  The Imprest Custodian shall always safeguard and account for the funds during its operation. In instances where the fund's custodian will be away, The HOD shall appoint a deputising custodian for the imprest fund management duties.  Before handing over to the deputising custodian, the Imprest Custodian shall conduct a proper reconciliation of the imprest fund being handed over.  The Custodian shall maintain a detailed record of al