Free On Board Shipping Point and Free On Board Destination are variations of the international shipping contract Free on Board (FOB). Buyers and sellers can only use FOB for shipments made by waterways and can’t apply to goods transported by vehicle or air.
What is Free On Board FOB Shipping Point?
Free on Board Shipping Point is where the seller assumes the cost of transport and fees until the goods arrive at the port of origin. Once the goods are loaded on to the ship, the buyer is financially responsible for costs relating to transport, customs, taxes and fees. The seller records the sale when the ship leaves the supplier’s dock.
What is Free on Board FOB Destination?
Free on Board Destination is where the seller assumes the cost of transport and fees until the goods reach their destination. The buyer takes delivery of the goods when they arrive at their receiving dock and must pay customs, taxes and fees.
What is the Difference Between the Two Types of FOB?
The key difference between the two terms is which point they transfer responsibility for the goods. FOB Shipping Point means the buyer takes responsibility when the goods arrive at the shipper, but with FOB Destination the buyer doesn’t take responsibility until the goods arrive at their port.
Variations of FOB Destinations
There are four variations to FOB Destination.
Freight Prepaid and Allowed
The seller pays the freight charges and continues as the owner of the goods during transit.
Freight Prepaid and Added
While the seller pays the freight charges, they are billed to the buyer. The seller continues as the owner of the goods during transit.
Freight Collect
The buyer pays and bears freight charges when the goods are received, but while in transit the seller remains the owner.
Freight Collect and Allowed
The buyer pays the freight charge when the goods are received and deducts the freight charges from the invoice. The seller bears the freight charges and is the owner during transit.
Accounting Differences
It's important, buyers and sellers have a point in time where the buyer takes ownership of the goods for accounting and capital assets. The moment of product transfer is needed, so it can be accurately entered in company records.
With FOB Shipping Point, the seller and buyer record the delivery when the shipment leaves the warehouse or shipping dock, but with FOB Destination, the seller and buyer record the sale/purchase when the shipment reaches the buyer’s dock. Ownership of the goods is defined by the bill of lading.
International Commercial Terms
Because of the complex nature of international trade and transport of goods around the world, buyers and sellers use a standard contract. Free on Board is one of the 11 Incoterms used on a contract, so the buyer and seller are both in agreement.
Published by the International Chamber of Commerce (ICC), the Incoterms® provides standardisation of rules and regulations around international trade and shipment of goods. For 100 years that Incoterms have been published, the three-letter abbreviations have saved many disputes between nations who may have had different trade laws.
The buyer and seller can’t share the risk that goods may be lost, damaged or destroyed. One party must be responsible for some or all at all times during transit.
The most important role of Incoterms® is to determine:
Time of delivery
Location of delivery
Party responsible for costs of transport and insurance
The party responsible for the risk of shipment loss and the point risk moves from seller to buyer
Incoterms® are published every 10 years with the most recent edition being Incoterms® 2020.
If you need assistance with manufacturing in China and shipping, contact Vara Allied on +61 8 6115 0118 or contact us online.
