Definitions

free on rail

Free On Board

FOB is an initialism for Free On Board or Freight On Board. Generally, FOB deals with the shipping of goods. It 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. Domestic shipments within the US or Canada often use a different meaning, specific to North America.

Incoterm

Under the Incoterm 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. 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 loaded on to 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 ships. When the ICC first wrote their guidelines for 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."

North America

The term FOB for "Freight On Board" is commonly used when shipping goods within the United States, to indicate who pays loading and transportation costs, and/or the point at which the responsibility of the goods transfers from shipper to buyer. This usage derives from the now obsolete US "Foreign Trade Definitions" of 1941.

"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. 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.

Note that this usage is inconsistent with the Incoterm standards. North American FOB usage corresponds to Incoterms 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

Accounting and auditing

When counting inventory for financial accountancy purposes, shipping terms determine whether goods in transit are added to a company's balance sheet. Items under "FOB shipping point/destination" (North American usage) generally do not appear in stock listings at year end. However, they should be included as the risk and rewards of ownership have transferred to the buyer.

With the advent of e-commerce, most commercial electronic transactions occur under the terms of "FOB shipping point" or "FCA shipping point". Most analysts see this as a disadvantage of online shopping compared to traditional in-person purchasing, where "FOB destination" is more prevalent.

References

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