NNPCL Finance and Accounts_Trade credit.pdf

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 pr...

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