As accountants, we sometimes need to peruse/assist in sales agreement/prepare pro-forma sales quotation which entails some basic  knowledge of typical commercial terms and condition.
Any confusion over the meaning used can result in a lost sale or a loss on sale. This is especially true when we are involved with international business transactions which has certain standard terms. Therefore, there is a need to understand some universally recognized set of definitions of international trade terms (FOB, CIF).

These universally recognized set of definitions of international trade terms is called INCOTERMS (International Commercial Terms)  which was developed by the International Chamber of Commerce (ICC) in Paris, France.

The advantages are:

• It defines the trade contract responsibilities and liabilities between buyer and seller.
• It is invaluable and a cost-saving tool. The exporter and the importer need not undergo a lengthy negotiation about the conditions of each transaction. Once they have agreed on a commercial term like FOB, they can sell and buy at FOB without discussing who will be responsible for the freight, cargo insurance, and other costs and risks.

The INCOTERMS was first published in 1936—INCOTERMS 1936—and it is revised periodically to keep up with changes in the international trade needs. The complete definition of each term is available from the current publication—INCOTERMS 2000. The publication is available at your local Chamber of Commerce affiliated with the International Chamber of Commerce (ICC).
Many importers and exporters worldwide are accustomed to and may still use the INCOTERMS 1980, the predecessor of INCOTERMS 1990 and INCOTERMS 2000.
Under the INCOTERMS 2000, the international commercial terms are grouped into E, F, C and D, designated by the first letter of the term (acronym), as follows:

• In practice, trade terms are written with either all upper case letters (e.g. FOB, CFR, CIF, and FAS) or all lower case letters (e.g. fob, cfr, cif, and fas). They may be written with periods (e.g. F.O.B. and c.i.f.).
• In international trade, it would be best for exporters to refrain, wherever possible, from dealing in trade terms that would hold the seller responsible for the import customs clearance and/or payment of import customs duties and taxes and/or other costs and risks at the buyer’s end, for example the trade terms DEQ (Delivered Ex Quay) and DDP (Delivered Duty Paid). Quite often, the charges and expenses at the buyer’s end may cost more to the seller than anticipated. To overcome losses, hire a reliable customs broker or freight forwarder in the importing country to handle the import routines.
• Similarly, it would be best for importers not to deal in EXW (Ex Works), which would hold the buyer responsible for the export customs clearance, payment of export customs charges and taxes, and other costs and risks at the seller’s end.

The next article (Part 2)  is on the Meaning/Definition of the INCOTERMS.

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Related Entries

• International Commercial Terms (INCOTERMS) – Part 2 of 2
• Sale and Leaseback