Meaning
Logistics provisions for the costs associated with transporting and clearing imported goods ensure that the net value of inventory reflects the true expense of making it available for sale. Freight and duty reserves are deductions from the borrowing base that account for the unpaid liabilities related to shipping and international tariffs. Calculated adjustments prevent a lender from advancing funds against assets that still carry significant unpaid transport costs.
Logistics Provision
Global supply chains require the movement of materials across borders where various taxes and fees accrue. The freight and duty reserves capture these anticipated expenses before they are officially invoiced by the carrier or customs authority. Maintaining this reserve protects the lender from the risk that shipping companies might place a lien on the goods to recover unpaid freight charges.
Cost Estimation
Accuracy in calculating the reserve depends on current shipping rates and the specific harmonized tariff codes of the materials. Because freight and duty reserves are based on estimates, they are adjusted frequently to match the actual costs seen in recent shipments. This audit process ensures that the demonstrated rate of landing costs aligns with the financial reporting on the balance sheet.
Inbound Liability
Unpaid duties represent a priority claim that could supersede a lender’s interest in the event of a liquidation. The freight and duty reserves function as a necessary subtraction to reach the net orderly liquidation value.
