Amortization of Drydock Expenses
🧩 What is Drydocking?
Drydocking is the process of removing a ship from water to perform maintenance, repairs, and inspections. It’s a major expense that occurs every few years, depending on the type of vessel and regulatory requirements.
🧠 Why is Drydocking Expense Amortized?
1. It’s a Non-Recurring, Large Expense
Drydocking is not an annual expense — it happens every 3–5 years. If you were to record the full cost in one year, it would distort the company’s profitability for that year and make it hard to compare performance across periods.
2. Matching Principle (Accounting Concept)
Under the accrual basis of accounting, expenses should be matched with the revenues they help generate.
- Drydocking improves the operational efficiency and safety of the vessel.
- The benefits of drydocking are spread over several years.
- Therefore, the cost should be allocated over the period during which the asset (the ship) continues to provide economic benefits.
3. Amortization as a Method of Allocation
Instead of recognizing the full cost in one year, companies amortize the drydocking expense over the number of years between drydockings.
For example:
- If a ship undergoes drydocking every 4 years and the cost is $100,000,
- Then each year, the company would record a $25,000 amortization expense ($100,000 ÷ 4).
📊 How is This Treated in Financial Statements?
✅ In the Income Statement:
- A yearly amortization expense is recorded (e.g., $25,000 per year).
- This avoids a huge dip in profits during the drydocking year.
✅ In the Balance Sheet:
- The remaining unamortized portion of the drydocking cost is shown as a liability or an asset, depending on how it’s treated.
- If the expense has been paid in advance (i.e., cash was paid before the drydocking), it might be listed as a prepaid expense (asset).
- If the expense hasn’t been paid yet, it might be listed as a liability (provision or accrued expense).
🔍 Example Scenario
| Year | Drydocking Cost | Amortization Expense | Unamortized Balance |
|---|---|---|---|
| 2020 | $100,000 | $25,000 | $75,000 |
| 2021 | – | $25,000 | $50,000 |
| 2022 | – | $25,000 | $25,000 |
| 2023 | – | $25,000 | $0 |
In this case, the full $100,000 is amortized over 4 years.
🧠 Key Takeaways
| Aspect | Explanation |
|---|---|
| Why amortize? | To match the expense with the benefit over time, not just in the year it occurs. |
| Impact on Income Statement | Smooths out earnings by spreading the cost over multiple years. |
| Impact on Balance Sheet | Shows the remaining obligation or prepaid amount related to future drydocking. |
| Regulatory Requirement | Some industries (like shipping) require regular drydocking, making this practice standard. |
✅ Summary
Drydocking expenses are amortized in the yearly financial statements to reflect the true cost of maintaining the vessel over its useful life, rather than recognizing the entire expense in the year it occurs. This approach follows the matching principle and ensures more accurate and consistent financial reporting.
Let me know if you’d like an example of the actual journal entries for drydocking amortization!