NNPC Limited Finance and Accounts Process and Procedures.pdf
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2023
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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, Modificatio...
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 all users of the Pcard and the purpose for which the card was used. Imprest funds shall not be utilised for the following: Loans to staff Personal commitments Travel allowances Reimbursement of travel expenses Procurement of asset items Expenditures for non-office operations related items Any other expenditure which is not necessary, reasonable and for which a clear business/operational purpose does not exist. Imprest requisition shall be made by the custodian of the imprest fund and approved by the Head of the need Department. Approved requests shall be processed by the Accounts Payable unit and Treasury within 48 hours of receiving approving request. The P-card shall be funded by the Treasury Department at the beginning of each month to a maximum of N300,000. This shall be adjusted subsequently based on changing business needs. 37 NNPC Limited Finance and Accounts Process and Procedures A justification for the review of the limit shall be provided by the requesting department and approved by the Head of Finance. Approval to spend funds from the P-card shall be by the Head of Department. In the absence of the Head of Division/Department, his designate shall authorise any spending from the card. All approvals shall be made via an email. There shall be zero tolerance for any custodian who disburses funds without due approvals. Transactions paid for with the P-card shall be supported by a receipt unless it is impracticable to obtain a receipt for the payment. 4.2 Imprest Reconciliation and Replenishment Imprest reconciliation shall be done monthly, not later than the third working day of each succeeding month. Original receipts or documentary evidence for cash expenditure shall be submitted by staff and shall adequately describe the nature of the goods or services purchased. Unreceipted petty cash expense shall be supported with adequate confirmation for the expenditure. Original invoices shall be submitted by suppliers/vendors for goods/services provided. All receipts and invoices should be clearly marked “PAID”. Duplicate copy of receipts and documents not showing an amount or method of payment (invoices, order confirmations) shall not be acceptable as receipts supporting expenditure incurred. Reimbursement for properly approved expenses may be obtained directly from the imprest fund. Replenishment request shall only be made when previous imprest funds have been properly accounted for by the respective Finance Department. 4.3 Imprest Fund Audit 38 NNPC Limited Finance and Accounts Process and Procedures The GRC function shall carry out periodic imprest fund audit without notice to the Imprest Fund Custodian of any department within NNPC Limited and its subsidiaries. On completion of each petty cash audit/count, a report shall be prepared by the GRC representative, and a copy shall be submitted to the following with recommendations (where required). Respective HODs Head of Finance Head of Treasury Supply Chain Management Refer to the Internal Audit and Governance Policy for Details 4.5 Compliance Governance, Risk and Compliance (GRC) shall perform a biennial review of the execution of this Policy for compliance and report any infringement accordingly. 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. 4.6 References This policy is an integral part of the NNPC Limited Finance and Accounts Policy Manual. It is complemented by the Supply Chain Management Policy and Procedures. 39 NNPC Limited Finance and Accounts Process and Procedures 40 NNPC Limited Finance and Accounts Process and Procedures 5.0 Common Cost Management 5.1 Objectives The purpose of this policy is to provide guidance for administering common overhead expenditure including sponsored projects between business units and NNPC Limited. The processes under this policy section are designed to ensure: A clearly defined cost allocation plan is operational; The basis of corporate overhead allocation is flexible to align with organizational changes and satisfies internal and external audit analysis, taxation and regulatory requirements. Complete recognition of all corporate overhead expenditures that are attributable to the Business Units (BUs) in each accounting period. 5.2 Scope/Applicability The sub-processes covered under this section include: 5.3 Cost allocation plan; Overhead cost allocation methodology; Recovery of Costs; and Reconciliation and reporting Policy Statements All common costs shall be allocated in line with the approved Cost Allocation Plan. All shared service arrangement shall be guided by SLAs duly executed by participating entities (Service Providers and Recipients). 41 NNPC Limited Finance and Accounts Process and Procedures NNPC Limited and its Subsidiaries shall comply with the provisions of relevant tax laws and any other regulatory guidelines in the allocation of overhead costs to respective Business Units. All corporate overhead expenditure shall be allocated to business units at actual cost i.e., at no mark-up or discounts to ensure competitive neutrality and compliance with the Transfer Pricing Policies. 5.4 Procedural Guidelines Management for Overhead Cost 5.4.1 Overhead Cost allocation Plan Overhead costs shall consist of the costs of central services and other support functions shared across business units within the Group. Typically, such services are initially paid by NNPC limited and charged back to the various business units that directly benefited from such services. The cost allocation process shall be guided by an Overhead Cost Allocation Plan (CAP). The Plan shall contain among others the following: A brief description of the service, an identification of the units rendering the services and the business units receiving the services. A list of central service costs across support functions The methodology or basis for allocation/charge out rate A summary schedule showing the allocation of each service to the specific benefitting business units. Summary of total allocations The documentation required for charges 42 NNPC Limited Finance and Accounts Process and Procedures The Budget and Planning Department shall develop/ update the CAP annually with changes in cost drivers and more appropriate allocation basis. The CAP shall be reviewed together with the operating expenditure (OPEX) budget in the annual budget preparation cycle and shall be approved alongside the annual budget. All incremental costs which are determined to be significant will be included in the cost allocation plan. The allocation of indirect costs will be predicated upon a method that is reasonably relative to the activity and the related costs. The CAP shall contain projected figures which shall be effective from January to December of every year. 5.4.2 Cost Allocation Methodology Service Level Agreement (SLA) SLAs shall be executed by participating entities (Service Providers and Recipients) and shall serve as a reference point for the basis for allocating common costs. At minimum, the SLA shall contain the following: Parties to the shared service (Service provider and the Service Recipient(s). Details of service(s) to the shared Basis for allocating the shared cost(s) Method of billing and cost recovery Terms of payment Scope of service provision Terms and conditions for service provision Penalties for default in service provision or the payment terms 43 NNPC Limited Finance and Accounts Process and Procedures Conditions for modifications to SLA Direct expenses incurred by one business unit on behalf of another shall be charged to the relevant business unit through the appropriate intercompany account as soon as they are incurred. The agreed functional cost groups shall be applied by all parties to the shared cost arrangements to ensure consistency and comparability in accumulation of shared costs across participating parties and projects. Service Recipients shall only be charged after the service(s) have been rendered. Charges to the benefiting BU shall not exceed the cost and level of service that each BU receives. NNPC Limited shall charge direct costs to the specific cost centre to which the expenditure relates. The allocation of overhead costs shall be done in such manner as to ensure: Overall tax optimization; Short term liquidity of Business Units; Long term stability of Business Units; and Effective cost control for optimization of resources. The Finance and Accounts Department shall be responsible for maintaining adequate records of general overhead costs for the purpose of allocation to relevant BUs. The Finance and Accounts Department shall maintain a schedule of the approved corporate overhead costs. Expenses incurred directly or on behalf of a specific business unit shall be charged as a direct intercompany expense to the business unit and supported by the relevant transaction documents. 44 NNPC Limited Finance and Accounts Process and Procedures Overhead cost incurred by the cost centres shall be allocated (but not limited to) on the basis contained in Appendix 1. Adjustment of corporate overhead charge to the actual total overhead shall be carried out at year end, and any over/under absorption shall be apportioned to the BUs as appropriate. NNPC Limited shall charge management fees to National Petroleum Investment Management Services (NAPIMS) for PSC arrangements and support. The management fee charge shall be invoiced in advance using the CAPEX budget for each business unit at the beginning of the financial year. Under or over recovery of overheads determined after actual activity at current year end shall be adjusted for in the subsequent financial year. Cost Allocation Basis All direct costs shall be attributed to the Service Recipient on the basis of causation. NNPC Limited and its subsidiaries shall apply an appropriate causal factor in determining the cost allocation basis for each cost group. In the absence of an appropriate casual factor for a cost group, the Service provider shall adopt an applicable weighted average factor for allocating shared costs. (Refer to Appendix II for list of shared expenses and their basis for allocation). 5.4.3 Recovery of Costs Payments for shared service costs shall be made by the Service Recipient to the Service provider in line with the pre-agreed terms contained in the SLA. The following guidelines shall apply in the recovery of costs: The Service Provider shall bill each Service Recipient for its share of common costs for the preceding month as part of month end 45 NNPC Limited Finance and Accounts Process and Procedures closing activities. The Service provider shall include monthly service utilization schedule or transaction statement summary to the invoice/debit notes sent to the Service Recipient. Upon receipt of invoice/debit note and other support documents from a Service Provider, Service Recipients shall ensure prompt payments in line with the payment timelines agreed in the executed SLA. All billed services shall be recovered in full by the Service Provider (full cost recovery) unless the SLA provides otherwise. Direct expenses incurred by one business unit on behalf of another shall be charged to the relevant business unit through the appropriate intercompany account as soon as they are incurred. Common overheads shall be allocated on a quarterly basis. Debit notes shall be issued by the Finance Department to the relevant BUs and other related subparts for shared cost recovery. Cost recovery expense will be billed based on the annual rate as established in the approved cost allocation plan. Corporate overhead expenses shall be invoiced based on actual costs generated from the ledger balances the current financial year. The Head of Finance and Accounts or designate shall approve quarterly billing of shared overhead expenses. For other financial costs that may arise from the provision of shared service costs (e.g., overdraft or loans obtained by the service provider to provide shared services), such ancillary costs shall be embedded in the shared costs and borne by the respective service recipients. 5.4.4 Reconciliation and Reporting 46 NNPC Limited Finance and Accounts Process and Procedures Total expenses attributable to the Service Recipients and other related segments of NNPC Limited shall be fully captured and disclosed in their financial statements for the reporting period. NNPC Limited’s Finance and Accounts Department shall maintain proper records in line with approved policies and procedures to ensure that the basis of overhead allocation is reliable, justifiable and consistently applied across all business units. Overhead allocations shall be recorded by both the NNPC Limited and the benefiting BUs using the appropriate intercompany payable/receivable account codes and the relevant expense ledgers. Quarterly intercompany reconciliations shall be conducted to align apportioned costs and eliminate long outstanding balances from the ledgers. Refer to the procedural guide on Intercompany reconciliations in the Financial Reporting Policy and Procedural Guide for details. 5.5 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 there is a conflict between this policy and the provisions of the SLA, the SLA shall supersede this policy. 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. 5.6 References Overhead Cost Allocation Plan (CAP) Financial Reporting Policy and Procedural Guide Tax Policy and Procedural Guide 47 NNPC Limited Finance and Accounts Process and Procedures 48 NNPC Limited Finance and Accounts Process and Procedures 6.0 Property Plant and Equipment Management 6.1 Objectives This policy provides for guidelines on all activities to be performed in the acquisition, recording, capitalization, transferring and disposal of Property, Plant and Equipment. The processes under this section are designed to ensure: Adequate procedures for acquiring, classifying, recording, transferring, and disposing of PP&E Adequate procedures for tagging and verifying NNPC Limited’s PP&E Depreciation rate for PP&E classes are consistently applied across each class of asset within NNPC Limited in line with the approved accounting policies; and Adequate procedures for assessing and recognizing impairment of NNPC Limited’s property, plant, and equipment (where necessary), and in line with the requirements of IFRS. 6.2 Scope/Applicability The sub-processes covered under PP&E management include: Asset acquisition and capitalization; Asset safeguard and control (tagging, verification, and reconciliation) 6.3 Depreciation of assets Impairment of assets Transfer of assets Disposal of assets Property, Plant and Equipment Policy Statements 49 NNPC Limited Finance and Accounts Process and Procedures It is the policy of NNPC Limited to ensure effective management of its Property, Plant and Equipment as well as safety of the assets. All procurement of fixed assets shall be carried out in strict compliance with the Supply Chain Management (SCM) policy and procedural guide. All amounts expended on Property, Plant and Equipment, above the defined threshold and whether purchased, constructed or leased, shall be capitalised and depreciated, except for land. All PP&E owned by NNPC Limited, and its subsidiaries shall be classified, recorded and reported in line with the provisions of the applicable IFRS (IAS 16). All PP&E capitalised amounts shall be verified and tested for impairment on an annual basis in line with regulatory requirements. 6.4 Procedural Guidelines for PP&E Management 6.4.1 Asset Acquisition Guidelines All PP&E acquisitions shall be made in accordance with the provisions of the approved Capital Expenditure (CAPEX) budget for the year using only MM Module. PP&E requisitions must be reviewed and approved by the relevant HOD of the originating department. PP&E procurement shall be conducted in strict compliance with the Supply Chain Management Policy and Procedural Guide. Where an asset has been delivered, the SCM Officer who took delivery of the asset shall notify the User Department, GRC and the PP&E Accountant within 24 hours of delivery. Delivered asset shall be jointly inspected by a representative from the User Department and a staff from the GRC to ensure that goods 50 NNPC Limited Finance and Accounts Process and Procedures supplied meet the required specifications and conditions stated in the contract. If the delivered asset is acceptable after inspection, the transaction source documents (i.e., Delivery Note, Waybill, Copy of PO, Goods Receipt Note, job completion reports etc.) shall be sent to the Be sent to Budget and Projects Department within Unit within 24 hours of certification. The SCM Department or the User Department shall notify the insurance department of all PP&E acquisitions for insurance purposes. The insurance process shall be initiated upon receipt of an asset and before its deployment for use. Refer to the Insurance Management Policies and Procedural Guide for details. All capitalised assets shall be insured against fire, theft and natural disasters at minimum. All acquired assets shall be initially recognised at cost. The cost of the asset shall include import duties and non-refundable purchase taxes, and any cost directly attributable to bringing the asset to a working condition for its intended use. Refer to the NNPC Limited’s Accounting Policies for details. Subsequent to initial recognition, property, plant & equipment shall be reported at their acquisition cost less accumulated depreciation and any accumulated impairment losses. A PP&E register shall be maintained for all tangible assets. Key information to be tracked about each asset shall include date of purchase, description, asset code, category, location of asset, cost of asset, accumulated depreciation on asset and net book value. Where NNPC Limited or its Subsidiaries receive an asset as a gift or donation, the same shall be accepted through a formal acceptance agreement. The F&A Unit shall be informed for proper valuation of asset acquired as well as for making necessary entries the fixed asset 51 NNPC Limited Finance and Accounts Process and Procedures register. These valuations shall be based on a market value at the time of receipt. 6.4.2 Asset Capitalisation Guidelines The capitalisation threshold for PP&E shall be ₦1,000,000 or $5,000 for moveable and non-moveable assets. Components of an asset shall be capitalised if the cost of the component is within or exceeds the capitalisation threshold stated in this policy. However, in certain cases, it is appropriate to aggregate individually insignificant value items such as chairs and tables, printers, computers and UPS etc. and apply the capitalisation threshold to the aggregate value. Any expenditure subsequent to acquisition of an asset which increases the operating capabilities of the asset and or the useful life of the asset shall be capitalised. Such expenditure shall include major additions or major improvement to existing assets. Examples of such additions also include expansion, extension, etc. Leasehold improvements shall be capitalised if up to the capitalisation threshold stated above. 6.4.3 Asset Tagging Guidelines The following asset tagging guidelines shall apply to NNPC Limited and its Subsidiaries: All capitalized fixed assets owned/controlled by NNPC Limited, and its subsidiaries shall be affixed with barcode tags. The only exceptions shall be buildings, land and improvements and any other assets that cannot be removed or stolen. Under no circumstance shall the tags be removed or altered except under appropriate management approval. 52 NNPC Limited Finance and Accounts Process and Procedures The tags shall be consistently placed in the same location on each similar asset type. The tags shall be placed, if possible, where they can be: Easily accessible Easily identifiable without disturbing the operation of the asset. The PP&E Unit shall be responsible for overseeing the tagging of all physical assets. The tagging shall be done by a designated administrative officer in the user department. Assets shall be tagged upon receipt by the user department before the asset is deployed for use. If an asset must be assembled before the tag can be affixed, the Administrative Officer will monitor the asset and coordinate with the destination department to tag the asset upon assembly completion. Where more than one (1) quantity of the same asset is included in the fixed asset register, each asset shall be tagged separately with its unique code but under same asset class. A fixed asset acquired or constructed as an accessory or modification to an existing asset that is already included in the asset register shall not be tagged; rather, it shall be treated as an improvement to the existing asset. However, where the accessory or modified asset is not a permanent addition to the existing asset, it should be tagged and tracked separately. Where a tag on a fixed asset is missing, worn out, damaged or require replacement, the Administrative Officer for the respective User Department shall notify the PP&E Unit for immediate remediation. 6.4.4 Asset Verification and Reconciliation Guidelines 53 NNPC Limited Finance and Accounts Process and Procedures The verification exercise shall be performed on a bi-annual basis and coordinated by Budget and Projects department that performs a supervisory role of all Assets across the NNPC Limited and its Subsidiaries. The verification shall involve confirming the existence, location and condition of each asset, and comparing them against the fixed asset register. An Asset Verification Team (AVT) shall be responsible for conducting such exercise. The AVT shall consist of: PP&E personnel Finance and Account Department personnel at each subsidiary GRC User department personnel Specialist from technical departments Store personnel/administrative officers In the course of asset verification, the validation of the assets listed in the asset register shall be done with an asset count sheet which shall be signed off by the PP&E Manager and the representative from GRC. The PP&E Unit shall prepare a detailed Fixed Asset Verification and Reconciliation Report. Inconsistencies between the physical count and the asset register shall be duly investigated following consultations with the Head of Finance and Accounts, Head of User Department, and Stores Personnel and Technical Experts. Where assets listed in the PP&E register are observed to be damaged or not in use within a given period, such observations shall be flagged in the Fixed Asset Verification and Reconciliation Report. 54 NNPC Limited Finance and Accounts Process and Procedures PP&E General Ledger (GL) balance shall be reconciled to the PP&E register on a monthly basis to ensure that movements (i.e., acquisitions, disposals and transfers) and reclassification of the PP&E accounts are accurately recorded and classified. 6.4.5 Asset Depreciation Guidelines Depreciation of an asset shall begin when it is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Once an asset’s cost is capitalised, it shall be written off periodically or depreciated, in a systematic manner over the useful life of the asset. Depreciation shall be computed on a monthly basis and charged against the results of operations in that month. Refer to the NNPC Limited’s Accounting Policy for Depreciation accounting. Capital improvements to PP&E shall be depreciated over the remaining useful life of the asset. 6.4.6 Asset Impairment Guidelines An annual assessment shall be undertaken each year to determine the extent, if any, to which PP&E may have been impaired. This consideration enhances confidence of users of financial statements that the carrying amounts of assets have not been overstated. Where annual inspection is impractical, inspections shall be undertaken within more suitable operational time frame. This assessment shall be documented and recorded as part of the annual financial statements, for review by the external auditors. An item of PP&E shall be deemed to be impaired if it meets the following conditions: 55 NNPC Limited Finance and Accounts Process and Procedures The asset's market value has declined significantly more than would be expected, as a result of the passage of time or normal use during the period. Significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated. The carrying amount of the net assets of the entity is more than its market capitalisation. Evidence is available of obsolescence or physical damage of the asset. Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected. Please refer to Impairment of Non-Financial Asset section in the Group Accounting Policy manual for details. 6.4.7 Asset Transfer Guidelines This refers to the transfer of assets from one department, division or subsidiary to another. Asset transfer shall represent a retirement of the asset for the transferring party and an acquisition for the receiving party. The following guidelines shall apply in the transfer of assets within NNPC Limited and its Subsidiaries: Transfer of assets between parties with similar company codes shall be regarded as an intra-company transfer while a transfer between parties with dissimilar company codes shall be regarded as an intercompany transfer. The transfer of an asset from an entity to another shall be initiated using an asset transfer form. This shall be duly signed by the HOD of 56 NNPC Limited Finance and Accounts Process and Procedures the user department and the Head of Finance and Accounts of the requesting entity. Asset transfer shall be sanctioned by the Head of Finance and Accounts of the transferring entity taking into consideration the asset cost, location, the justification for such transfer, and the availability of the asset for transfer by the entity. The checklist shall contain the following inter alia: Asset type Asset code Asset name and description Current location Current condition Designated trustee Assets shall be transferred at net book value. Depreciation on assets transferred shall continue over the remaining useful life of the asset except in instances where the asset transferred is revalued or the expected useful life is re-assessed. All asset transfer shall be endorsed by the CFO and approved by the CEO. 6.4.8 Asset Disposal Guidelines The following guidelines shall apply in the disposal of fixed assets by NNPC Limited and its Subsidiaries: A Corporate Assets Boarding and Disposal Committee (CABDC) shall be constituted by the CFO at the Corporate level subject to approval by the CEO. The CABDC shall have a Chairman not below the level of GGM and Secretary to be nominated from Budget and Project department of Federation Accounts Division. 57 NNPC Limited Finance and Accounts Process and Procedures Membership of the CABDC shall comprise representatives from Assets Section, Supply Chain Management, Insurance, Legal, GRC, Security, General admin Service departments, NUPENG and PENGASSAN. At respective Subsidiaries, there shall be an Asset Disposal Committee (ADC) shall be constituted by the Head of Finance and Accounts subject to approval by the respective MD. The membership of respective Subsidiaries ADC shall be drawn from Assets Section, Supply Chain Management, Insurance, Legal, Audit, Security, General admin Service departments, NUPENG and PENGASSAN. The ADC at the SBUs shall collaborate with CABDC for all activities relating to assets disposal. The CABDC shall coordinate and supervise the ADC at the SBUs for matters relating to boarding and disposal of assets. All boardable assets at the corporate level, SBUs and CSUs shall be submitted to NTB for approval through the Chairman or Secretary of CABDC before any disposal of assets can be carried out. There shall be no disposal of any assets (including JV assets) across NNPC Limited and its Subsidiaries without the approval of NTB. Membership of Assets Accountant in the Assets Disposal Committee (ADC) at the SBU level shall be compulsory. The Committee shall be charged with the responsibility of assessing the disposals proposed by the user departments and coordinating the disposal of approved PP&E items. However, in the case of status assets assigned to management staff such as cars etc., the disposal will be determined by HR policy and guidelines. 58 NNPC Limited Finance and Accounts Process and Procedures The ADC shall determine if the asset to be disposed is useful in another business location or department. They shall consider the following: Whether there are net disposal benefits, either in financial or other forms. Whether there are secondary service obligations associated with the asset which may necessitate its retention Whether a disposal can be carried out without adverse impacts on the physical environment. A minimum of 60% of the Committee members shall constitute a quorum. The Chairman of the Committee shall call a meeting as may be required with a five-day (working days) notice period at minimum. An asset shall also be considered for disposal when such asset is: permanently withdrawn from use In a non-usable state has no future economic value badly damaged and no more economically feasible to repair. Any gain or loss arising, being the difference between any disposal proceeds and the carrying amount, shall be recognised as profit or loss in the Statement of Comprehensive Income. A PP&E register/schedule of all disposed assets shall be maintained by the PP&E Unit and presented to the external auditors each year. Recommendations for replacement or disposal of movable assets, which have not been fully depreciated, shall originate from the user department. This request shall be in writing, duly signed by the HOD, addressed to CABDC through the Head, Finance and Accounts and shall contain at the minimum: 59 NNPC Limited Finance and Accounts Process and Procedures Asset code and location; Depreciation charge on the asset; Date of acquisition; Justification for disposal; Cost of acquisition; Book value; Estimated resale value; Name, signature, and designation of the originator; and Name, signature, and designation of the head of the division/department. The disposal price for PP&E shall be determined by an open bid process (in line with the requirements of the SCM policy and procedural guide) or a reserved price as determined by the ADC/CABDC. The disposal of assets to registered third parties called salvage buyers shall be duly approved for boarding by senior management. The disposal shall be conducted via an open competitive bidding and asset shall be sold to the highest bidder. NNPC staff shall have the first bidding right for all movable assets approved for boarding by management. Disposal shall be by secret balloting, and the asset will be sold at a reserved price to staff, who shall have the first right of refusal. The Finance and Treasury Department shall oversee receipt of payment for disposed asset and issue a receipt to the buyer. This receipt alongside the ADC/CABDC report and approval shall form the basis for derecognising an asset from the GL. 60 NNPC Limited Finance and Accounts Process and Procedures All assets that have been disposed shall only be transferred to the buyer upon receipt of evidence of payment from Treasury Department. Accounting entries for asset disposal and decommissioning costs shall be in line with the applicable IFRS as contained in the Group Accounting Policy. 6.5 Compliance Governance, Risk and Compliance (GRC) shall perform periodic review of the execution of this Policy for compliance and report any infringement to the Board. 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. 6.6 References SCM Policy and Procedural Guide Group Accounting Policy 61 NNPC Limited Finance and Accounts Process and Procedures 62 NNPC Limited Finance and Accounts Process and Procedures 7.0 Inventory Management 7.1 Objective This section documents guidelines in requisitioning, receiving, inspecting, storing, and tracking inventory items within NNPC Limited and its subsidiaries. The processes under inventory management are designed to achieve the following objectives: Ensure proper handling of all materials received to eliminate wastages and ensure safety. Maintain storage, preservation, and systematic distribution of inventory items to various users. Ensure up to date documentation to enhance accountability in the Company's inventory holding. 7.2 Scope/Applicability The policy covers the following sub-sessions and is applicable to NNPC Limited and its subsidiaries: 7.3 Inventory requisition Inventory receipt Inventory issuance Inventory monitoring and replenishment Inventory measurement and reconciliation Inventory disposal Policy Statements Inventory requisition for NNPC Limited and its subsidiaries shall be initiated in line with the supply chain management process. 63 NNPC Limited Finance and Accounts Process and Procedures All inventory items received into the store shall be checked for correctness and completeness. Inventory items delivered that do not meet specification as contained in the contract, shall be returned to the vendor within 72 hours of inspection, unless it is impracticable to do so. Inventory items issued from the stores shall be on a First-In-FirstOut/ First-Expiry-First-Out basis. Where an inventory item is received later with a close expiry date, such inventory item shall be issued First. NNPC Limited and its subsidiaries shall conduct inventory count and reconciliation on a quarterly basis. The CFO of NNPC Limited or the MD of respective subsidiaries shall approve all request to transfer and/or dispose inventory items. 7.4 Procedural Guidelines 7.4.1 Inventory Requisition Request for inventory shall be initiated by respective need departments/business units and approved by the Head of the requesting department/business unit. Processing of inventory requisition shall be in line with the Supply Chain Management (SCM) policy and procedural guide. 7.4.2 Inventory Receipt All incoming inventory items shall be received with appropriate documentation including: Packing list ` Delivery note Invoice where applicable. 64 NNPC Limited Finance and Accounts Process and Procedures Other relevant documents The User department along with the Supply Chain Management Officer and the GRC representative shall validate orders received into the store and confirming that materials supplied meet specific technical requirements (this applies predominantly to oil and gas consumables, specialised spares, and production materials). Inspection of supplies shall be conducted within two (2) working days of delivery. Materials/goods received from suppliers that do not meet product specifications shall be considered as non-conforming items and any such items shall not be received into the warehouse. Inventory (except for petroleum products) shall be transferred into the store from the receiving area only after they have been captured on the inventory register and secured against tampering. The stores and user departments shall be involved in identifying, inspecting, and coding new inventory items for stacking. Identification details shall be recorded financial system and made traceable to their physical location on the shelf/cabinets. Inventory received into the store shall be identified with inventory identification tags and kept at designated locations for easy traceability. Every receipt of material shall be reflected in the Inventory Register. The store personnel shall be responsible for proper update of the Inventory Register. Inventory including petroleum products shall be properly preserved against conditions that cause deterioration in quality such as the intrusion of dust and moisture and evaporation. For materials having relatively short life, the Store Officer shall perform routine checks frequently for expiration. 65 NNPC Limited Finance and Accounts Process and Procedures Where inventory items require special preservation, the user department shall inspect such inventory item items for deterioration in quality and repackaging where necessary to prevent damage. Organisation and storage of inventory items shall comply with warehouse rules. Inventory shall be stored in standard stock keeping units; storage areas shall be clearly marked and shall not obstruct aisles and exits. 7.4.3 Inventory Issuance Inventory Request by User Department All inventory request from user departments such as Engineers, Plant Managers and user department officers shall be done through a Material Issuance Request (MIR) form or its equivalent. All MIR shall be approved by the relevant HOD or Project Manager in line with the authority matrix. Only inventory request with duly approved MIR shall be processed by the Store Officer. Basis for Inventory Issuance Inventory items issued from the stores shall be on a First-In-FirstOut/ First-Expiry-First-Out basis. An inventory item maybe brought later with a close expiry date and should therefore be issued First. Issuing of materials for project job/maintenance job to contractors are to be based on material request, approved by site’s approving authority. Materials with expiry dates shall be closely monitored to avoid losses. The store record shall be updated immediately the requesting department has been issued the Inventory items. Spares issued from the store could either be categorized as Inventory or Property, Plant and Equipment (PP&E). 66 NNPC Limited Finance and Accounts Process and Procedures Inventory items could be classified as Inventory if they meet up with the defining criteria as stated in IAS 2 (Refer to the NNPC Limited’s accounting policies for details) Inventory Items could be classified as PP&E only if they meet up with the defining criteria as stated in IAS 16 or meet the capitalization threshold (Refer to the NNPC Limited’s accounting policy for details). Inventory Transfer Inventory transfers between plants/ sites or main warehouse and other plants/ sites shall be initiated using a Material Transfer Request (MTR). All MTRs shall be duly approved by both HODs/Project Managers and the Head of Finance. The Store Officers at both locations shall capture inventory movement in the inventory register. The receiving location shall post the inventory at the unit cost specified on the material transfer note upon receipt of the inventory items. Sending location shall also send the unit cost of asset transferred via the company’s email to the receiving location. All transfer transactions shall have zero effect on the NNPC Limited’s financial records as all inventory items transferred are to be received and recorded by the receiving department/location at the same unit price used by the transferring department/ location as indicated on the material transfer note. 7.4.4 Inventory Replenishment and Monitoring The Stores Officer shall be responsible for managing inventory in the storage areas, m
