Free On Board
Encyclopedia
FOB is an initialism which pertains to the shipping
of goods. Depending on specific usage, it may stand for Free On Board or Freight On Board. FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability
for goods lost or damaged in transit from the seller to the buyer.
Precise meaning and usage of "FOB" can vary significantly. International
shipments typically use "FOB" as defined by the Incoterm standards, where it always stands for "Free On Board". Domestic shipments within the US or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterm standards.
North American FOB usage corresponds to Incoterm
s approximately as follows:
standard published by the International Chamber of Commerce
, FOB stands for "Free On Board", and is always used in conjunction with a port of loading. Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays cost of marine freight
transport, insurance
, unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods pass the ship's rail at the port of shipment.
For example, "FOB Vancouver" indicates that the seller will pay for transportation of the goods to the port of Vancouver
, and the cost of loading the goods on to the cargo ship (this includes inland haulage, Customs clearance, origin documentation charges, demurrage
if any, origin Port handling charges, in this case Vancouver). The buyer pays for all costs beyond that point (including unloading). Responsibility for the goods is with the seller until the goods pass the ship's rail. Once the cargo is off of the ship, the buyer assumes risk.
Due to potential confusion with domestic North American usage of "FOB", it is recommended that the use of Incoterms be explicitly specified, along with the edition of the standard. For example, "FOB New York (Incoterms 2000)". Incoterms apply primarily to international trade
, not domestic trade
within a given country.
This use of "FOB" originated in the days of sailing ship
s. When the ICC first wrote their guidelines for the use of the term in 1936, the ship's rail was often still relevant, as goods were often passed over the rail by hand
. In the modern era of containerization
, the term "ship's rail" is somewhat archaic for trade purposes. The standards have noted this. Incoterms 1990 stated, "When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use." Incoterms 2000 adopted the wording, "If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used."
, the term FOB is commonly used when shipping goods to indicate who pays loading and transportation costs, and/or the point at which the responsibility of the goods transfers from shipper to buyer.
"FOB shipping point" or "FOB origin" indicates the buyer pays shipping cost, and takes responsibility for the goods when the goods leave the seller's premises. "FOB destination" designates the seller will pay shipping costs, and remain responsible for the goods until the buyer takes possession.
Previously, under the Uniform Commercial Code
, both "FOB origin" and "FOB destination" left the seller responsible for paying costs of loading goods on board the carrier; hence "Free On Board". When the buyer was responsible for loading costs as well, the UCC term was "FAS", "Free Alongside". Currently, the UCC has removed FOB and FAS leaving the definition of these terms up to the interpretation of the parties or the applicable state's law. Many states have wholly or in part adopted the UCC terms without realizing that the UCC has abandoned the definitions.
A related but separate term "CAP" ("customer arranged pickup") is used to denote that the buyer will arrange a carrier of their choice to pick the goods up at the seller's premises, and the liability for any damage or loss belongs to the buyer.
In North American usage, the expansion "Freight On Board" is also seen.
for financial
statement audit purposes, shipping terms determine whether goods in transit are added to the buying company's balance sheet
. At year- and period-end goods in transit under "FOB destination" (North American usage) appear on the seller's balance sheet but not in the buyers balance sheet, as the risk and rewards of ownership change to the buyer at the "destination" port. Items in transit under "FOB shipping point" at period end should be included as the risk and rewards of ownership have transferred to the buyer at the time of shipment. For example, if Seller ships products to Buyer on December 28, 2009 to be delivered to Buyer on January 3, 2010 and the shipping terms are FOB shipping point, then Buyer would record the shipped products on its books on December 28, 2009. However, if the shipping terms were FOB destination, then Buyer would not record the products until they reach destination on January 3, 2010. Import fees when they reach the border of one country to enter the other country under the conditions of FOB Destination are...
With the advent of e-commerce, most commercial electronic transactions occur under the terms of "FOB shipping point" or "FCA shipping point".
Shipping
Shipping has multiple meanings. It can be a physical process of transporting commodities and merchandise goods and cargo, by land, air, and sea. It also can describe the movement of objects by ship.Land or "ground" shipping can be by train or by truck...
of goods. Depending on specific usage, it may stand for Free On Board or Freight On Board. FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
for goods lost or damaged in transit from the seller to the buyer.
Precise meaning and usage of "FOB" can vary significantly. International
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
shipments typically use "FOB" as defined by the Incoterm standards, where it always stands for "Free On Board". Domestic shipments within the US or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterm standards.
North American FOB usage corresponds to Incoterm
Incoterm
The Incoterms rules or International Commercial terms are a series of pre-defined commercial terms published by the International Chamber of Commerce widely used in international commercial transactions...
s approximately as follows:
| North America | Incoterm |
|---|---|
| FOB shipping point or FOB shipping point, freight collect | FCA shipping point |
| FOB shipping point, freight prepaid | CPT destination |
| FOB destination or FOB destination, freight prepaid | DDU destination |
| FOB destination, freight collect | No Incoterm equivalent |
Incoterm
Under the IncotermIncoterm
The Incoterms rules or International Commercial terms are a series of pre-defined commercial terms published by the International Chamber of Commerce widely used in international commercial transactions...
standard published by the International Chamber of Commerce
International Chamber of Commerce
The International Chamber of Commerce is the largest, most representative business organization in the world. Its hundreds of thousands of member companies in over 130 countries have interests spanning every sector of private enterprise....
, FOB stands for "Free On Board", and is always used in conjunction with a port of loading. Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays cost of marine freight
Cargo
Cargo is goods or produce transported, generally for commercial gain, by ship, aircraft, train, van or truck. In modern times, containers are used in most intermodal long-haul cargo transport.-Marine:...
transport, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods pass the ship's rail at the port of shipment.
For example, "FOB Vancouver" indicates that the seller will pay for transportation of the goods to the port of Vancouver
Vancouver
Vancouver is a coastal seaport city on the mainland of British Columbia, Canada. It is the hub of Greater Vancouver, which, with over 2.3 million residents, is the third most populous metropolitan area in the country,...
, and the cost of loading the goods on to the cargo ship (this includes inland haulage, Customs clearance, origin documentation charges, demurrage
Demurrage
The term demurrage originated in vessel chartering and refers to the period when the charterer remains in possession of the vessel after the period normally allowed to load and unload cargo . By extension demurrage refers to the charges that the charterer pays to the shipowner for its extra use of...
if any, origin Port handling charges, in this case Vancouver). The buyer pays for all costs beyond that point (including unloading). Responsibility for the goods is with the seller until the goods pass the ship's rail. Once the cargo is off of the ship, the buyer assumes risk.
Due to potential confusion with domestic North American usage of "FOB", it is recommended that the use of Incoterms be explicitly specified, along with the edition of the standard. For example, "FOB New York (Incoterms 2000)". Incoterms apply primarily to international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
, not domestic trade
Domestic trade
Domestic trade, also known as internal trade or home trade, is the exchange of domestic goods within the boundaries of a country. This may be sub-divided into two categories, wholesale and retail. Wholesale trade is concerned with buying goods from manufacturers or dealers in large quantities and...
within a given country.
This use of "FOB" originated in the days of sailing ship
Sailing ship
The term sailing ship is now used to refer to any large wind-powered vessel. In technical terms, a ship was a sailing vessel with a specific rig of at least three masts, square rigged on all of them, making the sailing adjective redundant. In popular usage "ship" became associated with all large...
s. When the ICC first wrote their guidelines for the use of the term in 1936, the ship's rail was often still relevant, as goods were often passed over the rail by hand
Stevedore
Stevedore, dockworker, docker, dock labourer, wharfie and longshoreman can have various waterfront-related meanings concerning loading and unloading ships, according to place and country....
. In the modern era of containerization
Containerization
Containerization is a system of freight transport based on a range of steel intermodal containers...
, the term "ship's rail" is somewhat archaic for trade purposes. The standards have noted this. Incoterms 1990 stated, "When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use." Incoterms 2000 adopted the wording, "If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used."
North America
Within the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the term FOB is commonly used when shipping goods to indicate who pays loading and transportation costs, and/or the point at which the responsibility of the goods transfers from shipper to buyer.
"FOB shipping point" or "FOB origin" indicates the buyer pays shipping cost, and takes responsibility for the goods when the goods leave the seller's premises. "FOB destination" designates the seller will pay shipping costs, and remain responsible for the goods until the buyer takes possession.
Previously, under the Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
, both "FOB origin" and "FOB destination" left the seller responsible for paying costs of loading goods on board the carrier; hence "Free On Board". When the buyer was responsible for loading costs as well, the UCC term was "FAS", "Free Alongside". Currently, the UCC has removed FOB and FAS leaving the definition of these terms up to the interpretation of the parties or the applicable state's law. Many states have wholly or in part adopted the UCC terms without realizing that the UCC has abandoned the definitions.
A related but separate term "CAP" ("customer arranged pickup") is used to denote that the buyer will arrange a carrier of their choice to pick the goods up at the seller's premises, and the liability for any damage or loss belongs to the buyer.
In North American usage, the expansion "Freight On Board" is also seen.
Accounting and auditing
When counting inventoryInventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
for financial
Financial accountancy
Financial accountancy is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders...
statement audit purposes, shipping terms determine whether goods in transit are added to the buying company's balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
. At year- and period-end goods in transit under "FOB destination" (North American usage) appear on the seller's balance sheet but not in the buyers balance sheet, as the risk and rewards of ownership change to the buyer at the "destination" port. Items in transit under "FOB shipping point" at period end should be included as the risk and rewards of ownership have transferred to the buyer at the time of shipment. For example, if Seller ships products to Buyer on December 28, 2009 to be delivered to Buyer on January 3, 2010 and the shipping terms are FOB shipping point, then Buyer would record the shipped products on its books on December 28, 2009. However, if the shipping terms were FOB destination, then Buyer would not record the products until they reach destination on January 3, 2010. Import fees when they reach the border of one country to enter the other country under the conditions of FOB Destination are...
With the advent of e-commerce, most commercial electronic transactions occur under the terms of "FOB shipping point" or "FCA shipping point".