A few more advanced questions related to the question under
discussion are reviewed below.
Transfer of Title and Risks and Rewards
To recognize a sale of goods, the seller must transfer title
to the goods and all risks and rewards associated with the goods. Usually,
title transfer implies the transfer of risks and rewards, so when the title is
transferred, the seller can recognize a sale. However, sometimes risks and
rewards are not transferred even though the title may have been. For example,
if the seller sold a product to a customer under FOB shipping point terms, but
during transportation the product was damaged, and the seller replaced the
product at no charge to the customer, the risks and rewards associated with the
product didn’t transfer until the product reached the customer. In cases when
the seller uses the FOB shipping point terms, however, the seller still bears
the risks and rewards until the product reaches the customer: the shipping
terms are, in essence, FOB destination, and the seller should not recognize a
sale until the product gets to the customer.
Other Shipping Terms
FOB shipping point and FOB destination are two commonly used
shipping terms. There are other shipping terms as well. For example, in
international shipments, Incoterms 2000 may be used. Intecoterms 2000 provides
a wide spectrum of shipping terms letting the seller and buyer determine when
the title and risks and rewards are transferred, among other things. For
example, the shipping term EXW (EX Works) means the seller transfers all risks
and rewards associated with the goods upon shipment from their premises (e.g.
factory). On the other side of the spectrum is the shipping term DDP
(Delivered Duty Paid), where the seller retains risks and rewards associated with
the inventory until it is delivered to a named place of destination.
