FOB Destination

FOB destination is a delivery term in a contract for the sale of goods under which the seller must, at its own expense and risk, transport the goods to the named place and there tender delivery of them (UCC 2-319(1)(b)). Until that tender happens both risk of loss and title stay with the seller by default, so the seller pays the carrier and the seller carries the loss if the shipment is damaged or destroyed on the way.

The code treats F.O.B. as a delivery term even where it appears only alongside the stated price, so a line reading FOB Denver on a quote is not a pricing footnote. It fixes where the seller’s delivery obligation ends (UCC 2-319(1)). The rule is a default rather than a mandate, since the subsection opens with “unless otherwise agreed”, and states enact it in their own commercial codes, as California does at Commercial Code 2319 (California Commercial Code 2319).

What Changes Hands at the Destination

Risk of loss moves at tender, not at the loading dock. Where the contract requires the seller to deliver at a particular destination and the goods are duly tendered there while in the carrier’s possession, risk of loss passes to the buyer when they are so tendered as to enable the buyer to take delivery (UCC 2-509(1)(b)). That allocation yields to what the parties actually wrote, because the section is subject to their contrary agreement (UCC 2-509(4)).

Title turns on the same moment, behind a stricter override. Unless otherwise explicitly agreed, title passes to the buyer at the time and place where the seller completes performance with reference to physical delivery, and where the contract requires delivery at destination, title passes on tender there (UCC 2-401(2)(b)). Risk can be reallocated by any agreement. Title needs an explicit one.

What It Means at a Period-End Close

A shipment sold FOB destination that has left the seller’s dock and has not arrived is still the seller’s at the reporting date unless the contract moves control earlier. The seller reports no revenue and no receivable for it and keeps the goods in inventory, and the buyer records neither inventory nor a payable. That is a cutoff question, and it runs on the same timing logic as the rest of accrual accounting.

The shipping term is evidence of the accounting answer rather than the answer itself. Revenue is recognized when an entity satisfies a performance obligation by transferring a promised good to the customer, and an asset is transferred when the customer obtains control of it (FASB ASU 2014-09, paragraph 606-10-25-23). For a performance obligation satisfied at a point in time, the indicators of that transfer include, and are not limited to, the following (FASB ASU 2014-09, paragraph 606-10-25-30).

• A present right to payment for the asset, since a customer that is presently obliged to pay may already have the ability to direct the asset’s use and take substantially all of its remaining benefits.
• Legal title, which points to who can direct the use of the asset and restrict other parties’ access to its benefits.
• Transferred physical possession, though possession and control do not always sit with the same party.
• The significant risks and rewards of ownership, read excluding any risk that gives rise to a separate performance obligation.
• The customer’s acceptance of the asset, read against whatever acceptance clause the contract carries.

FOB destination speaks directly to three of those five: legal title, physical possession, and the risks and rewards of ownership. That is why the term usually settles the timing, and why it does not settle it alone where an acceptance clause or a right to payment points somewhere else.

The term also changes what the goods cost the buyer. Inbound freight the buyer pays belongs in the cost of the inventory rather than in period expense, on the same bringing-it-to-its-condition-and-location test (Accounting Research Bulletin No. 43, Chapter 4, Statement 3) that overhead applies to production cost. Under FOB destination the seller bears the transport charge to the named place, so unless the contract separately makes the buyer pay the carrier, the buyer has no inbound freight to add to the current asset it eventually books.

A Worked Cutoff

Say a supplier invoices a customer for a shipment sold FOB destination, the truck leaves on the last business day of the period, and it arrives four days later.

Invoice value of the shipment                50,000
Carrying cost of those goods                 32,000
Position at the reporting date               in transit

Seller reports    no revenue, no receivable, 32,000 still in inventory
Buyer reports     no inventory, no payable

Nothing about the invoice date or the truck’s departure moves either line. Tender at the named place does.

How Federal Contracts Define It

A federal supply contract does not run on the commercial default. F.o.b. destination there means free of expense to the Government delivered, on board the carrier’s conveyance, at a specified delivery point where the consignee’s facility is located, with the supplies delivered at the contractor’s expense to that facility’s warehouse unloading platform or receiving dock, or to its wharf where the destination is a port city and the supplies are for export (FAR 47.303-6(a)). The contractor pays and bears all charges to the specified point of delivery, and is responsible for any loss of or damage to the goods occurring before the consignee receives the shipment there (FAR 47.303-6(b)).

The passing rules then differ from the commercial default in a way that shows up at a close. Title to supplies passes to the Government upon formal acceptance, regardless of when or where the Government takes physical possession, unless the contract specifically provides for earlier passage. Unless the contract specifically provides otherwise, on an f.o.b. destination contract risk of loss passes upon acceptance or upon delivery at the destination specified in the contract, whichever is later (FAR 46.505). Arrival alone does not end the contractor’s exposure.

What FOB Destination Is Confused With

FOB Shipping Point

The mirror term moves both moments to the origin. Where the term is F.O.B. the place of shipment, the seller ships at that place and bears the expense and risk of putting the goods into the carrier’s possession (UCC 2-319(1)(a)). Risk of loss then passes to the buyer when the goods are duly delivered to the carrier (UCC 2-509(1)(a)), and title passes at the time and place of shipment (UCC 2-401(2)(a)).

Goods in transit at a reporting date therefore sit on opposite balance sheets under the two terms.

FOB in the Incoterms Rules

FOB destination is not an Incoterms rule, which matters on an international order where the same three letters carry a different meaning. In the Incoterms 2020 set, FOB is Free on Board, one of four rules written for sea and inland waterway transport, and it names a port of loading (International Trade Administration, Know Your Incoterms). The rules named for delivery at the destination itself are Delivered at Place, Delivered at Place Unloaded, which adds the seller’s duty to unload the goods from the arriving means of transport, and Delivered Duty Paid.

The Incoterms rules also leave out when title, or ownership of the goods, passes from the seller to the buyer (International Trade Administration, Know Your Incoterms). On a domestic sale that question is answered by the passing-of-title rules instead (UCC 2-401).

Common Questions

If your firm wants cutoff work like this handled by an offshore team you have already graded on your own files, that is what a trial task is for.