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The expansion of the global market and the rise of e-commerce has led to some interesting challenges for international shippers. As logic would denote, the further away you’re shipping your freight, the more complicated the process becomes. To help simplify that, at least in part, international commercial laws have been established over the past few decades to help standardize the rules and regulations surrounding the shipment and transportation of goods.
However, even with the standardization, international trade is still a complicated process, especially when you consider that trade laws are often very different from country to country. To that end, many companies establish contracts between their organization and their customers, which can help streamline the process of shipping goods internationally.
These international contracts establish and outline various provisions, including the time and place of delivery and the terms of payment agreed upon by the two parties. These provisions can cover several different subjects, such as when does the risk of loss shifts from the seller to the buyer, or who foots the bill for freight and insurance?
To help facilitate these contracts and to set clear terms and conditions between the parties, the International Chamber of Commerce (ICC) has published a list of International Commercial Terms (Incoterms).
Here, we will look at the difference between Free Onboard (FOB) shipping point and free onboard destination as they are vital incoterms for shippers and important to understand.
While the two terms are similar in both sound and meaning, there is a distinct difference between them. That distinction is important as it specifies who is liable for goods that have been lost or damaged during shipping.
The term free on board (or freight on board) simply refers to freight that is being shipped over water instead of land or air. About 90 percent of all global freight is shipped via ocean and sea freight.
“884 million tons of products moved by water in 2015. Of this total, 95 million tons were export goods, 246 million tons were imported goods, and the remaining 544 million tons were moved by water within the United States. BTS projects the amount of cargo transport that will increase each year at around 1.4% until 2045,” According to data from the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS).
Free on Board: Shipping Point
The FOB shipping point (or FOB origin) means that the buyer will receive the title for the goods they purchased once they’ve reached the shipping dock. After the title is transferred, the seller’s responsibility ends, and it falls to the buyer to ensure their goods reach their final destination promptly and in sound condition.
In this type of agreement, the buyer assumes full responsibility for the goods after the seller delivers them to the carrier. If the designated carrier should happen to lose or damage any of the goods during transit or the final leg of the delivery, the seller cannot be held responsible for any losses or damages, leaving the buyer to cover the cost.
Free on Board: Destination
A FOB destination agreement is the other way around. Here the title of ownership is only transferred from seller to buyer when the goods have reached the final destination set by the buyer. In a FOB destination agreement, the seller retains ownership of the goods (and is therefore responsible for replacing damaged or lost goods) up until the point where the goods have reached their final destination.
If a shipper sends out freight, but that freight never arrives at the customer, the shipper is responsible for either replacing or reimbursing the cost of the goods.
Different terms Mean Different Accounting
In addition to when responsibility and title for freight change hands, there is another difference between FOB shipping point and FOB destination. Only the party that possesses the title can claim the freight as part of their inventory. Because inventory counts can affect budgeting and income, i.e., the seller can only claim the goods as “sold” after they’ve transferred title and responsibility to the buyer, this is an important distinction.
According to Investopedia, “Shipping terms affect the buyer’s inventory cost because inventory costs include all costs to prepare the inventory for sale. This accounting treatment is important because adding costs to inventory means the buyer does not immediately expense the costs, and this delay in recognizing the cost as an expense affects net income.”
Because the buyer assumes liability after the goods are placed on a ship for transport, the company can claim the goods as an increase in inventory. The same timing would also apply to the shipper, as they can claim that the goods have been sold after delivering them to the port of departure. Should any loss or damage occur during transit, the buyer can file a claim since they are the company that holds the title at that time.
On the other hand, the accounting rules are different when operating under FOB destination. Here, neither the buyer nor the seller can claim the difference in inventory until the goods have reached their final destination.
These agreements also determine who pays for freight expenses during shipping, which includes taxes, customs duties, and other fees. With a FOB shipping point option, the seller only pays transportation costs required to get the freight to the shipping dock, after which the buyer assumes all of the associated costs. With a FOB destination contract, the buyer is only responsible for the costs of getting the freight to their desired location from the final port.
Why Buyers and Sellers Both Need Better Visibility
The assumption of responsibility is important when it comes to shipping and receiving goods. Depending on which agreement is made for the shipment, either the buyer or the seller accepts the risk of loss, damages, or other fees associated with that freight shipment. This also includes detention and demurrage fees, which can decidedly ratchet up the cost of shipping freight. With that being said, better visibility is key to keeping the shipping costs minimal.