Drydock Costs Put Focus on Accounting Methods

Back when more cars on American roads were American made, the land battleships had huge bumpers. “Joe lunch bucket” types took to embellishing those bumpers with stickers like “Mechanics do it with torque” – “it” of course being whatever one’s favorite, or second favorite, organ might conjure. Unfortunately, before this new American art form could migrate from street-parked Chevrolets to cul de sac BMWs, bumper size was in retreat along with the rest of American auto-making. Too bad. The gray-suited, Eagle Scout bean counters might finally have won their day in the hay with “Accountants get the timing right.”

On the subject of drydocking expenses, timing is only part of the challenge, albeit a very important part. The matching principle requires that revenues and the costs incurred in their realization should coincide, or match, as nearly as possible. But once the ship is in drydock, what is an expense incurred in achieving revenues to date and what is a capital improvement to be amortized over future accounting periods? And if it is indeed an income statement item, is accrual or expense accounting more appropriate? The magnitude and potential impact of the figures can be appreciated from estimates made a few years ago by Det Norske Veritas for average steel renewal on VLCCs per each Special Survey (Figure 1).

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