Dry-docking costs

Why do ships go into dry dock?

Classification societies, which certify that vessels are seaworthy, require a special survey every five years and an intermediate survey around halfway between, with the underwater parts of the hull inspected at each. Younger vessels may be allowed an in-water survey by divers for the intermediate inspection, but older ones generally dry-dock twice in every five years. In dry dock, the hull is cleaned and recoated, worn steel is replaced, propellers, rudders, shaft seals and valves are overhauled, and the class surveyors carry out their inspection.

Dry-docking costs: what is capitalised?

A vessel's dry-dock invoice is US$ 1.8 million. Of this, 1.4 million is for the survey, hull blasting and coating, steel renewal and overhaul of underwater equipment, which restores the vessel's condition for the next five years. The other 0.4 million is for repairing a damaged crane and routine maintenance that would have been done anyway.

The 1.4 million is capitalised as a new dry-docking component and depreciated over 5 years to the next special survey, 0.28 million a year. The repairs are expensed. Costs such as yard fees, tugs and the class surveyor's fees are part of the capitalised cost when they relate to the survey and restoration work. Earnings lost while the vessel is off hire are not costs and are never capitalised, and costs of sailing to and from the yard are usually expensed.

What happens to the previous dry-docking component?

It is derecognised when the new dry-dock is done. If the previous dry-dock cost 1.5 million and was depreciated over 5 years, but the vessel docked after 4.5 years, 0.15 million is still on the balance sheet and is written off as a loss on derecognition. Docking later than planned extends the period over which the old component is used, and the depreciation period is revised prospectively when the plan changes. See component depreciation.

Why is no provision made for future dry-docks?

IAS 37 allows a provision only for a present obligation arising from a past event. An owner is not obliged to dry-dock a vessel it could instead sell, lay up or scrap; the requirement attaches to continuing to trade the vessel, which is a future action. IAS 37's own illustration of an aircraft overhaul required by law reaches the same conclusion. So the cost is recognised when the dry-dock is done, through the component approach, not accrued in advance. Obligations under a lease to return a vessel in a specified condition are different; see lease return conditions.

How are new and second-hand vessels treated?

For a newbuilding, part of the cost is identified as the initial dry-docking component, reflecting the new coating and survey status, and depreciated until the first special survey. For a second-hand vessel, the owner estimates the component from the cost of a typical dry-dock and the time since the last one, and depreciates it over the time to the next. See vessel components and depreciation.

How are dry-docking costs presented?

Capitalised dry-docking is part of vessels in property, plant and equipment, and its depreciation is part of depreciation. In the cash flow statement, payments for dry-docks capitalised under IFRS are investing cash flows. Owners usually disclose the number of vessels dry-docked, the off-hire days and the expected dry-dock schedule, because both cost and lost time affect earnings.

How does US GAAP differ?

US GAAP allows a choice of methods for planned major maintenance: expensing dry-docks as incurred, the deferral method, which capitalises the cost and amortises it to the next dry-dock, or the built-in overhaul method, close to the IFRS component approach. Most US GAAP shipping companies use the deferral method, presenting the balance as deferred dry-docking costs and often classifying the payments as operating cash flows. Accruing in advance is not allowed under either framework. The same issues arise for aircraft; see maintenance reserves and checks and shipping accounting.

This guide is general information. It is not tax or legal advice for your situation.