FOB Shipping Point vs. Destination

FOB Shipping Point vs. Destination: What You Need to Know

Free on Board (FOB) is an Incoterm that dictates the responsibilities of sellers and buyers during the transport of goods, generally through the sea, ocean, and inland waterways.

Key concepts

FOB shipping point

FOB shipping point, also known as FOB origin, is a variant of the FOB Incoterm. It states that the seller’s responsibility over the cargo ends once it is loaded onto the vessel at the port of origin. From that point, the consignee (buyer) is responsible for the goods until they reach the final delivery point.

FOB destination

FOB destination mandates that the seller bear the responsibility for the goods until they reach the buyer’s chosen delivery point.

Detailed explanation

FOB shipping point

Transfer of ownership: Ownership transfers from the seller to the buyer once the goods are loaded onto the vessel at the origin port.
Risk of loss: The seller bears the risk up to the same point. From then onwards, the buyer faces liability for any damage to the goods.
Shipping costs: FOB origin can be further classified into “freight collect” and “freight prepaid”. Under the former, the buyer pays for the maritime transport, while the seller covers this cost in the latter. If not specified, the buyer covers these costs.
Accounting implications: Revenue is recognized by the seller when the goods are loaded at the origin point. They then include the cost of goods sold (COGS) in their financial statements and credit (decrease) their inventory account.

FOB destination

Transfer of ownership: Ownership of the goods transfers from the seller to the buyer once the goods reach the buyer’s chosen destination.
Risk of loss: The seller bears a majority of the risk as the buyer is only liable after the goods reach their premises.
Shipping costs: Depend on the usage of freight collect or freight prepaid. If not specified, the seller covers these costs.
Accounting implications: The seller recognizes the revenue when the goods reach the buyer’s designated delivery location. At that point, they include the COGS in their financial statement and credit their inventory account.

Examples

FOB shipping point

A manufacturer based in Sweden agrees to export industrial machinery to a distributor in Norway. They quote a price of 500,000 SEK and FOB shipping point terms. That means that the seller’s responsibility ends once the machinery is loaded at the port of Stockholm, Sweden. From this point, if the machinery is damaged or lost, the importer cannot ask the manufacturer to reimburse them as ownership and liability have been transferred.

FOB destination

In the same scenario, let’s say the buyer and seller agreed to FOB destination terms. Suppose the machinery never arrives at the buyer’s premises. Since the manufacturer still has ownership, they take full responsibility and must either reship the machinery or reimburse the buyer.

Implications for business

Logistics and transportation

FOB origin: The buyer is responsible for arranging the main carriage, managing shipping schedules, and handling any logistics challenges that arise during transit.
FOB destination: The seller takes on these responsibilities.

Risk management

FOB origin: The buyer must consider insuring the main carriage since the risk of loss passes to them.
FOB destination: Sellers bear total liability for the goods and should secure transit insurance. Implementing robust tracking and monitoring systems can also help mitigate risks.

Accounting and financial reporting

FOB origin: Revenue is recognized when goods are loaded onto the main carriage. At that point, the seller decreases their inventory and tracks the sale as an account receivable. The buyer increases their inventory and tracks it as an account payable.
FOB destination: Revenue is recognized and the sale is recorded only when the goods reach the buyer’s location. This delayed revenue recognition for the seller can affect quarterly or annual financial statements.

Customer relations

FOB origin: Buyers have more control over the shipping process, which can benefit those with established logistics capabilities. However, the increased responsibility for risk could lead to dissatisfaction.
FOB destination: Buyers generally prefer this term as it minimizes their risk and logistics burden. Sellers often use it to enhance customer satisfaction and build trust.

Advantages

FOB shipping point

For sellers

Early revenue recognition and improved cash flow
Bearing no risks during the main carriage
Minimal logistics planning required
More time to focus on core business operations.

For buyers

More control over the shipping process
Freedom to tailor risk management strategies to ensure the safety of goods
Flexibility in choosing cost-effective carriers
Clear cost allocation and upfront visibility of total expenses.

FOB destination

For sellers

Greater oversight of the delivery process, enabling quality control
Opportunity to ensure proper handling of goods, improving customer relationships
Ability to consolidate shipments and benefit from economies of scale
Reduced risk of disputes over damaged goods.

For buyers

Only being liable for the cargo upon delivery to a chosen destination
No responsibility for insuring the goods as the seller bears all risk
No logistics management needed, ensuring a seamless delivery experience
Payment due upon receipt of goods.

Disadvantages

FOB shipping point

For sellers

Limited control over goods during transit, possibly leading to client dissatisfaction
Potentially less attractive offer — the final cost for the buyer may be much higher if they lack negotiation power
Competitive disadvantage, especially if other suppliers are offering comprehensive solutions.

For buyers

Bearing a majority of the transport risks
Responsible for arranging transit to the final destination
Unable to raise disputes or receive compensation in case of loss or damage
Must arrange insurance to ensure proper handling of goods
May incur higher transportation costs, especially if they lack logistics infrastructure.

FOB destination

For sellers

Bears a majority of the risk, assuming all liability till the final delivery point
Responsible for managing transportation logistics
Must arrange insurance to protect against loss or damage of goods
Delayed revenue recognition, impacting financial statements
Increased responsibility for ensuring timely and safe delivery
High potential for disputes, possibly needing to reimburse the buyer for loss or damage.

For buyers