Issue Description

NNPC did not apply market rate as advised by CBN to convert the sales proceeds received in US dollars.

NNPC explanation is that conversions were done at FAAC official rate as against the CBN rate.

However, the audit position is that sales proceeds received in US$ should have been remitted using the prevailing CBN rate for the month. The rationale being that these were transactions which originated between NNPC and third parties (i.e. Government-to-Business) and NNPC should have used the prevailing “market rate” at the time of remittance to the destination account (i.e. Federation account).

Therefore, NNPC using FAAC/ Government rate has resulted in a hidden gain to NNPC whereby treating the transactions as one that originated as Government-to-Government.

This practice led to under-remittance of N260.431million

Neiti Recommendations

NNPC should refund N260.43 million to the Federation Account.

NNPC should always use market rate to convert proceeds received from the third party in US$.

The use of FAAC rate should be limited to Government proceeds.

Status Implementation

Liability Valuation and Recognition

NNPC’s liabilities for domestic crude oil purchased is valued and recognized in the month of purchase/ lifting. The crude oil is strictly and consistently valued at International market price and converted to Naira using applicable exchange rate (as advised by CBN) in the month of transaction and same is reflected in the CBN component statement for that month. Thus, liabilities are recognized at the time of incurring the expenditure (Accrual Concept) and not at the time of payment in line with Generally Accepted Accounting Principles (GAAP). 

Liability Payment

The domestic crude oil liabilities are then settled after the three-month grace in which case the applicable CBN rate may have changed favourably or unfavourably. 

FAAC rate and CBN Rate

There is in fact nothing like FAAC determined exchange rate as all rates are provided by CBN.

The misunderstanding often stems from valuing domestic crude sale using the applicable rate in the month of payment (Month of FAAC) rather than month of lifting.  On the back of the above, NNPC has not shortchanged Federation in any way.