Meaning
Comparing delay charges against the total acquisition cost of an asset allows firms to treat these maritime fees as part of the capital investment. When a ship remains in port beyond the allotted time, demurrage capitalizations allow the firm to add these penalties to the value of the inventory. This method spreads the cost over the life of the product sale.
Asset Valuation
Inclusion of these fees increases the carrying value of raw materials on the balance sheet. Firms apply demurrage capitalizations when the delays are considered a necessary component of getting the goods into a usable state. Total landed cost provides a more accurate picture of the investment required for production.
Cost Identification
Separation of avoidable fines from standard operational expenses requires a tracking system. If the demurrage capitalizations include charges from poor planning, auditors may require the firm to write them off as a loss. Documentation of the cause for every delay is a prerequisite for this treatment.
Financial Statement
Balance sheets show a higher inventory value when these costs are moved from the income statement to the ledger of assets. Because the demurrage capitalizations delay the recognition of the expense, net income appears higher in the short term. Eventual sales will reflect the margin.
