Dry-docking and major overhaul of vessels as a separate component

The cost of a vessel dry-docking or major overhaul required for seaworthiness is capitalized as a separate component with its own depreciable life distinct from the vessel hull, while the carrying amount of any previous dry-docking component not yet fully depreciated must be derecognized when the new overhaul is capitalized. Failing to derecognize the old component when capitalizing a new one double-counts asset cost and overstates both the vessel's carrying amount and future depreciation base.

Was the dry-docking or major overhaul cost identified as a separate component at initial recognition of the vessel, with its own depreciation schedule tied to the classification survey interval? When a new dry-docking is performed, is any remaining carrying amount from the prior dry-docking component derecognized (written off) rather than left within the vessel's overall carrying amount? Does the new expenditure meet the recognition criteria of providing probable future economic benefit and being reliably measurable, distinguishing it from routine maintenance that should be expensed?

1) At initial recognition of the vessel, identify the dry-docking/major overhaul cost as a separate component if it was distinguishable at that time, with its own depreciation schedule tied to the survey interval. 2) When a new dry-docking or overhaul expenditure is incurred, assess whether it meets the general PP&E recognition criteria (probable future economic benefit, cost reliably measurable) rather than being routine maintenance. 3) If it qualifies, capitalize the new expenditure as a new dry-docking component. 4) Simultaneously derecognize the carrying amount of any remaining unamortized prior dry-docking component, regardless of whether it was separately identified in the past (estimate it if necessary using the remaining portion of the original overhaul cost). 5) Depreciate the new component over the period to the next scheduled survey.

Measure the new dry-docking component at its actual cost; depreciate it on a straight-line basis (typically) over the period to the next scheduled classification survey (commonly 2.5-5 years), separately from the hull and engine components which are depreciated over the vessel's overall useful life. Where the prior dry-docking component's original cost was not separately tracked, estimate its remaining carrying amount using a reasonable basis (e.g. straight-line amortization since the last dry-docking) for derecognition purposes.

Disclose: (1) the componentization policy for vessels, including the dry-docking component and its depreciation period, within the PP&E accounting policy notes; (2) the carrying amount and accumulated depreciation of the dry-docking component separately if material; (3) any loss on derecognition of a prior dry-docking component when a new overhaul is capitalized; (4) the basis used to estimate the remaining carrying amount of a prior component if not separately tracked historically.

• Expensing dry-docking costs immediately as repairs and maintenance despite meeting capitalization criteria, understating the vessel'
• s asset base and distorting expense timing
• failing to derecognize the residual carrying amount of the previous dry-docking component when a new overhaul is capitalized, resulting in double-counting and overstated depreciation going forward
• using an arbitrary or overly long depreciation period for the dry-docking component that does not align with the actual survey interval.