Free On Board
From Wikipedia, the free encyclopedia
Free On Board (FOB) is an Incoterm -- also commonly but incorrectly referred to as "Freight on Board". It means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays freight, insurance, unloading costs and transportation from the port of destination to the factory. The passing of risks occurs when the goods pass the ship's rail at the port of shipment. Internationally the term specifies the port of loading, e.g. "FOB New York" or "FOB Vancouver".
[edit] Overview
For example, in the USA it is still used as a left-over of the long-discontinued "Foreign Trade Definitions" of 1941, with at least four different versions which can lead to confusion.
Domestically within the United States and Canada, the term is used in two common phrases, "FOB shipping point" and "FOB destination," to distinguish when the title of goods passes from the seller to the buyer. Under the terms of "FOB shipping point," the title of the goods passes to the buyer at the shipping point. Similarly, under the terms of "FOB destination", the title of the goods passes to the buyer when the goods arrive at their destination. The distinction is important because it determines who pays for the shipping costs of the merchandise: whoever holds the title to the merchandise at the time of its shipping pays for its transportation costs unless otherwise noted (e.g., freight prepaid or freight collect). Also, it is important that if the shipment is damaged while traveling the owner must file the freight claim.
Note that this usage is inconsistent with the official Incoterm definitions, and should not be used for international shipping. North American FOB definitions correspond to Incoterm approximately as follows:
- 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: not commonly used, no Incoterm equivalent
When counting inventory, merchandise in transit plays a crucial role depending on whether it is added to the company's balance sheet. Items under "FOB shipping point/destination" are checked to see if the purchaser has title of the goods. If it does, then they are added to the inventory count, but not the balance sheet. If not, they are treated as would items under consignment, meaning they still belong to the supplier (consignor).
[edit] eCommerce
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.
