NNPCL Finance and Accounts_Intercompany Loans.pdf

NNPC Limited Finance and Accounts Process and Procedures 10.0 Intercompany Loans Management 10.1 Objectives This policy which applies to NNPC Limited, and its Subsidiaries is intended to provide a framework for the management of intercompany loans and is designed to ensure the following:  That th...

NNPC Limited Finance and Accounts Process and Procedures 10.0 Intercompany Loans Management 10.1 Objectives This policy which applies to NNPC Limited, and its Subsidiaries is intended to provide a framework for the management of intercompany loans and is designed to ensure the following:  That there is a defined structure for intercompany loans including the basis for granting intercompany loans, approvals, maximum loan tenure, repayments etc.  That intercompany loans are treated as arms-length transactions in line with transfer pricing regulations. 10.2 Scope/Applicability This procedural guide covers the following aspects of intercompany financing:  Guiding principles for intercompany loan  Pricing of intercompany loans  Restrictions on intercompany loans  Approval for intercompany loan  Monitoring and reporting 10.3 Intercompany Loan Policy Statement  NNPC Limited shall consider security-free intercompany loans as the first option for NNPC entities seeking financing for tenures not exceeding five (5) years.  Third-party loans shall only be considered for loan tenures not exceeding five (5) years where internal financing capacity is unavailable, or third-party funding is in the best interest of NNPC 93 NNPC Limited Finance and Accounts Process and Procedures Limited, as determined by the Chief Financial Officer (CFO) of NNPC Limited.  Intercompany loans must comply with the arms-length principle of transfer pricing in interest rates and other commercial terms, except for collateralization or third-party guarantees.  Intercompany loan decisions must be approved by the Managing Director of both the lending and borrowing entities, upon the recommendation of the CFO, after a thorough credit assessment has been performed on the borrowing entity.  The credit assessment will include understanding the purpose for the loan, structure of the loan, sources of repayment – which may also include an analysis of the borrowing entity’s cashflow forecasts and the strength of its balance sheet.  All intercompany loans shall be repaid in the loan currency except in special cases, to be made by the borrower, supported by the Treasurer of NNPC Limited and approved by the CFO. 10.4 Procedural Guidelines The following guidelines shall be followed in the negotiation and emplacement of an intercompany loan between NNPC entities: 10.4.1 General Guidelines  Funding shall be raised for qualifying capital or operating expenditure (preferably, self-liquidating projects/business ventures and working capital funding).  Requests for intercompany loans shall be assessed based on the following parameters:  The contribution of the financing purpose, to the strategic objectives and bottom line of the Subsidiary and NNPC Limited. 94 NNPC Limited Finance and Accounts Process and Procedures  Bankability of the project for which the loan is requested, where the loan is for project financing.  Lending capacity of the lending entity and debt capacity of the borrowing entity.  The credit/liquidity risk assessment for both lending and borrowing entities, and contingencies for mitigation.  Tax efficiency of the intercompany loan arrangement (e.g. withholding tax considerations).  Benefits of intercompany financing option to NNPC Limited and its Subsidiaries vis-à-vis other financing options, in the specific case.  Availability of more profitable alternative investment options for lending entities.  Cashflow forecast that clearly supports the borrowing entity’s capacity for interest servicing and principal repayment. No intercompany loan arrangement should be entered into without credible line of sight of repayment cashflows.  Audited Financial Statement (AFS) of the borrowing entity, any material information and/or other factor(s) deemed relevant for the loan decision.  Proposed terms of the loan.  The tenure of intercompany loans shall be a minimum of 30 days and a maximum of 5 years. 10.4.2 Pricing of Intercompany Loan Intercompany loans must demonstrate compliance with the armslength principle of transfer pricing in the pricing of interest rates and other commercial terms. Hence interest rates shall be benchmarked against the rate of interest chargeable in a similar but independent commercial loan. 95 NNPC Limited Finance and Accounts Process and Procedures Other relevant factors that must be considered include the amount and duration of the loan, level of non-performing loans standing against the proposed borrower, and the overall gearing level of the borrower.  Naira loan interest shall be priced at Prime Lending Rate.  Foreign currency loans shall be denominated in USD, and the applicable interest rate for USD loans shall be a floating base rate of SOFR (Secured Overnight Financing Rate) or its equivalent plus a fixed margin to be determined by the CFO with consideration for pricing of the most recent third-party borrowing. The appropriate SOFR reference rate shall be determined in line with the loan tenure and repayment terms as agreed by the parties. In determining what margin should be added to a base rate by the lending entity, the following matters shall be considered:  Similar industry practice  The currency of settlement  Tax and transfer pricing implications  Inflation volatility 10.4.3 Restrictions on Intercompany Loans To avoid threat to the going concern of a prospective lending entity, intercompany loan by any lending entity shall be restricted to a cumulative maximum of 25% of Shareholders’ funds per the most recent Audited Financial Statements. 10.4.4 Approval of Intercompany Loan All intercompany financing decisions must be approved by the Board of Directors of the lending and borrowing entities, upon the recommendation of the Treasurer of NNPC Limited, with the support of the CFO and endorsement of the Managing Directors of the lending and borrowing entities. The following guidelines shall be followed, in obtaining approval of the Board of Directors for intercompany loan proposals: 96 NNPC Limited Finance and Accounts Process and Procedures  All intercompany loan proposals shall be backed by an Intercompany Financing Proposal, to be raised by the borrowing entity and directed to the Treasurer of NNPC Limited for assessment and advice before further action.  Approval threshold for all Intercompany Financing Proposals and borrowing decisions shall be governed by the provisions of the Delegation of Financial Authorities (DFA) manual.  Upon obtaining approval, the lending and borrowing parties shall enter into a formal Loan Agreement, which shall be reviewed and supported by the Legal Division/Departments of the lender and borrower and executed by both parties prior to loan disbursement.  A loan drawdown and repayment schedule shall form part of the loan agreement. 10.4.5 Monitoring and Reporting  The Head, Finance and Accounts of the borrowing entity must submit to the Treasurer and CFO, a monthly fund utilization report with supporting documents evidencing the efficient utilization of the loan proceeds as well as a quarterly signed loan repayment schedule for interim and year end audit validation purpose.  The Head, Finance and Accounts of all lending and borrowing entities shall also present a quarterly credit performance report on intercompany loans to the Board of Directors of each entity.  The Head, Finance and Accounts of both the borrowing and lending entities must ensure timely, complete, and accurate recognition of the loan transactions in the General Ledger in accordance with relevant International Financial Reporting Standards (IFRS) requirement.  It is the responsibility of the Head, Finance and Accounts of both the borrowing and lending entities to ensure the effective utilization, 97 NNPC Limited Finance and Accounts Process and Procedures reporting and accounting for the loan proceeds, for full compliance with the repayment terms.  At year end, the Head of Accounts shall ensure that all intercompany loans are assessed for impairment in the books of the lending entity. 10.4.6  Default Repayment default for both principal and interest shall attract penalties.  The Head, Finance and Accounts of the borrowing entity must notify the CFO of a potential default at least fifteen (15) days before payment is due. 10.5 Compliance The Governance, Risk and Compliance team (“GRC”) 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. 10.6 Disclosure Requirements In the books of the Lending Entity: In accordance with the provisions of IAS 24, the Lending Entity shall disclose among others, the following:  Nature of the relationship with the borrowing entity  Full details of the loans granted.  Purpose for which the loan is proposed to be utilised by the recipient of the loan In the book of the Borrowing Entity: 98 NNPC Limited Finance and Accounts Process and Procedures In accordance with the provisions of IAS 24, the Borrowing Entity shall disclose among others, the following:  Nature of the relationship with the lending entity  Full details of the loans obtained.  Purpose for which the loan from the lending entity is to be utilised. (Refer to the Accounting Policy for detailed disclosure requirements) 10.7 References This policy forms part of the overall corporate financing policy for NNPC Limited and its Subsidiaries. Other references include:  IFRSs (IFRS 9, IAS 24).  Transfer pricing policy 99