Fob

Key takeaways
– FOB (Free on Board) is a shipment term that determines when responsibility (risk of loss or damage) and often the cost of freight transfer between seller and buyer.
– The two most common practical meanings are FOB Origin (buyer assumes risk once goods are loaded at the seller’s facility/port) and FOB Destination (seller retains risk until goods arrive at buyer’s location).
– Legal interpretation varies by jurisdiction and by which rules the parties adopt: U.S. contract law/UCC and ICC Incoterms use different formulations—always specify which set of rules governs the contract.
– Choice of FOB affects pricing, insurance, inventory accounting, customs, and dispute allocation. Each party should document responsibilities and include specific contractual language.

Sources: Investopedia (FOB overview), International Chamber of Commerce (Incoterms), Uniform Commercial Code (U.S.). See further reading links at the end.

What does “FOB” mean?
– Plain meaning: “Free on Board” indicates the point at which the seller has “delivered” goods for purposes of risk and sometimes cost.
– Legal nuance: FOB itself doesn’t always determine title (ownership) — title may be governed by the sales contract or bill of sale — but it is commonly used to allocate risk and freight costs.
– Jurisdiction matters: Under the UCC (U.S.), FOB terms in a contract help determine when risk transfers. Under ICC Incoterms (internationally), FOB has a precise meaning for sea and inland waterway shipments (delivery occurs when goods pass the ship’s rail at the port of shipment).

FOB in plain shipping terms
– FOB Origin (also “FOB Shipping Point”): Seller’s delivery obligation is satisfied when goods are handed to the carrier at the origin. Buyer assumes the risk of loss and typically pays freight (unless parties agree otherwise).
– FOB Destination: Seller’s delivery obligation is satisfied only when goods reach the buyer’s named destination. Seller retains the risk and usually pays freight until delivery (unless the contract states otherwise).

FOB Origin vs. FOB Destination — quick comparison
– Risk transfer: Origin = upon pickup/ loading; Destination = upon arrival to buyer.
– Freight costs: Origin = typically buyer pays; Destination = typically seller pays.
– Accounting/inventory recognition: Origin = buyer records inventory when shipment departs; Destination = buyer records inventory only when goods arrive.
– Control: Origin = buyer controls carrier choice; Destination = seller usually chooses carrier.

Benefits of FOB Origin (why a buyer may prefer it)
– Lower freight costs (buyer can negotiate carrier rates or use their preferred freight forwarder).
– Greater control and visibility over shipping and carrier choice.
– Faster recognition of inventory and potential quicker sales if buyer needs goods on intake.
– Potentially lower total landed cost for buyers with strong logistics capability.

Disadvantages and risks of FOB Origin
– Buyer bears transit risk (damage, loss) once goods load; cost of insurance and claims management fall on buyer.
– Buyer must manage export/import logistics or contract third parties.
– Potential administrative burden and need for logistical expertise.

Benefits of FOB Destination (why a seller or certain buyers may prefer it)
– Seller retains responsibility until goods are delivered, offering buyer peace of mind and better customer service.
– Buyer can inspect goods on delivery before accepting them.
– Reduced administrative burden for buyer: seller handles shipping arrangements and usually insurance.

Risks and disadvantages of FOB Destination
– Seller bears risk and freight costs until delivery — higher cost and potential for claims and replacements.
– Seller may have delayed revenue recognition (cannot record a sale until delivery in many accounting treatments).
– Seller’s logistics exposure increases (delays, damages, lost shipments).

FOB and company accounting — practical entries
– FOB Origin:
– Seller: Recognize sale and cost of goods sold once goods are shipped. Remove inventory from seller’s books at shipment.
– Buyer: Record inventory and a payable/ liability on shipment receipt (often when goods are shipped) and record freight-in/transportation costs as part of inventory or as freight expense depending on accounting policy.
– FOB Destination:
– Seller: Keep inventory on books until delivery; recognize sale and cost of goods sold only upon delivery and acceptance at buyer’s location.
– Buyer: Record inventory on receipt/delivery.

Free on Board — short example (international)
– Scenario: Seller in Shanghai loads goods to ship by sea; contract states “FOB Shanghai (Incoterms 2020).”
– Under Incoterms FOB: seller delivers when goods pass the ship’s rail at the port of shipment. From that point, buyer bears risk and must arrange and pay for freight, insurance, and import duties unless otherwise agreed.
– Note: Incoterms’ “FOB” is strictly for sea/inland waterway transport and has a technical meaning (delivery at ship’s rail).

FOB Origin example (practical)
– Dara Inc. (NYC) buys 1,000 electronic components from ABC Co. (Shanghai) — contract states “FOB Origin (Shanghai)”.
– Seller’s responsibilities: Pack, export-clear, and load goods onto the named carrier at Shanghai. Provide shipping documents (bill of lading, commercial invoice, packing list).
– Buyer’s responsibilities: Arrange/contract for ocean freight from Shanghai, pay freight and insurance, assume risk once goods are loaded, handle import clearance in the U.S., pay duties and inland transport.
– Accounting: ABC (seller) records sale at loading; Dara (buyer) records inventory and related payables upon shipment (or per contract terms).

FOB Destination example (practical)
– Same parties but contract states “FOB Destination — Dara Inc., NYC warehouse.”
– Seller’s responsibilities: Arrange and pay for freight and insurance until delivery to Dara’s warehouse; assume risk until delivery and acceptance; handle export paperwork.
– Buyer’s responsibilities: Receive and inspect goods at delivery and notify seller of any damages or shortages.
– Accounting: ABC (seller) records sale only when goods arrive and are accepted; Dara records inventory upon delivery.

Additional shipping terms commonly paired/compared with FOB
– CIF (Cost, Insurance, Freight): Seller pays cost and freight and obtains minimum insurance to destination. Under Incoterms CIF, risk transfers when goods cross the ship’s rail at port of shipment (like FOB), even though seller pays freight/insurance to destination.
– CFR (Cost and Freight): Seller pays cost and freight to destination port but does not procure insurance.
– DAP/DPU/DDP (Delivered At Place / Delivered at Place Unloaded / Delivered Duty Paid): Seller bears higher levels of responsibility, up to delivery and customs duties.
– EXW (Ex Works): Buyer bears virtually all responsibility from seller’s premises.
– Note: Use the correct set (e.g., Incoterms 2020) and clearly specify the place and version.

What is the difference between CIF and FOB?
– CIF (Cost, Insurance, Freight) — seller pays carriage and minimum insurance to destination; risk transfers when goods are shipped (at ship’s rail under Incoterms).
– FOB — seller’s responsibility ends once goods pass the ship’s rail (under Incoterms) or at the specified place (under UCC/contract). FOB typically does not include seller paying for freight or insurance beyond delivery at the origin unless parties agree otherwise.
– Practical effect: Under CIF the buyer pays less for freight and insurance upfront but still bears risk from the point of transfer (which under Incoterms is at loading).

Legal notes and best practice
– Don’t rely on the plain words “FOB” alone. Because interpretations differ by law (UCC vs Incoterms) and country, specify:
– Which rules apply (e.g., “Incoterms® 2020 — FOB Shanghai” or “FOB Origin — governed by UCC §2-319”).
– Exact named place (e.g., “FOB Seller’s Warehouse, 123 Export Rd., Shanghai” or “FOB Destination — Dara Inc. Warehouse, 50 Dock St., NYC”).
– Who procures insurance and the minimum coverage.
– Who pays for freight, customs, duties, unloading, and who handles claims.
– Payment and acceptance terms, inspection windows, and remedies for loss/damage.
– Include dispute resolution, applicable law, and who bears costs for re-work/replacement.

Practical checklist for buyers and sellers — choose and contract FOB terms the right way
1. Determine objectives:
– Buyer: want control of freight and insurance or want seller to manage shipping?
– Seller: can you absorb freight and risk until delivery or prefer buyer to handle logistics?
2. Specify precise contract language:
– State “FOB [named place] (Incoterms 2020)” or explicitly reference governing law/UCC.
3. Allocate risk and cost in writing:
– Who pays freight, insurance, import/export duties, unloading, and storage?
4. Decide carrier and insurance:
– If buyer selects carrier, confirm pickup windows and contact points; if seller selects, require timely tracking and notifications.
– Specify insurance minimums (e.g., “All-risks coverage at 110% CIF value”).
5. Document shipping milestones:
– Require copy of bill of lading, packing list, commercial invoice, and insurance certificate.
6. Inspection and claims:
– Define inspection period, inspection rights at delivery, and claims procedure and timeline.
7. Accounting and revenue recognition:
– Align internal accounting policies with contract terms (recognize sale on shipment vs delivery).
8. Customs and compliance:
– Confirm which party handles export documentation and import clearance; specify responsibilities for duties, taxes, and penalties.
9. Contingency planning:
– Include backup carriers, liability caps, and timelines for replacements or refunds for lost/damaged goods.
10. Periodic review:
– Reassess terms based on shipping cost trends and service levels.

Sample contract clause language (examples to adapt)
– Incoterms example: “Seller shall deliver the goods FOB Shanghai Port (Incoterms® 2020). Risk of loss transfers to Buyer when the goods have passed the ship’s rail at the port of shipment. Seller shall provide commercial invoice, bill of lading, and packing list. Buyer shall arrange and pay for ocean freight, insurance, and import clearance.”
– UCC-style example: “FOB Origin (Seller’s Facility). Seller’s responsibility ends and Buyer assumes risk and title (unless otherwise specified by bill of sale) once goods are loaded onto the carrier at Seller’s facility, and Buyer shall arrange transportation and insurance.”

Practical steps for handling a dispute or claim
1. Preserve evidence: photos, packaging, bills of lading, inspection reports.
2. Notify the other party immediately per contract notice requirements.
3. File carrier claims promptly (most carriers have strict claim windows).
4. If insured, submit proof to insurer and follow insurer’s claim process.
5. Use documentation (FOB clause, shipping documents) to determine who bears loss.
6. Escalate to mediation/arbitration as contract specifies if unresolved.

The bottom line
FOB is a critical contracting tool for allocating shipping risk and cost. Its meaning varies with context (domestic UCC rules versus international Incoterms), so always specify the exact place, applicable rules, and responsibilities for freight, insurance, customs, and handling. Choose the FOB approach that matches each party’s logistics capability, pricing strategy, and risk tolerance, and document it clearly to avoid disputes and accounting confusion.

Related resources
– Investopedia — “FOB” (source for concepts and examples): https://www.investopedia.com/terms/f/fob.asp
– International Chamber of Commerce — Incoterms 2020: https://iccwbo.org/resources-for-business/incoterms-rules/
– Cornell Legal Information Institute — Uniform Commercial Code (UCC): https://www.law.cornell.edu/ucc

If you’d like, I can:
– Draft a ready-to-use FOB clause tailored to your jurisdiction (U.S./Incoterms).
– Create a short checklist PDF you can attach to purchase orders.
– Produce sample journal entries tailored to your accounting policy (GAAP vs IFRS). Which would help most?