We are selling goods at C.I.F. terms to overseas customers. As I do think title and risk pass to buyer when delivered on board the ship, we always record sales based on the "loaded on board" date printed on bills of lading.
Our new auditor insisted that revenue can only be recognized after the goods arrived at the named port of destination. Is she right?
Gary Chan
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Check your terms and conditions of sale
It is usual for the place of transfer of title to be the same as the place to which the seller pays the costs of transportation.
So, with cif sales, the seller pays transportation to the buyer's nominated port and normally title passes there.
With fob sales, the seller pays transportation to the vessel and title passes once on board.
These are general practices, not rules of law.
To see whether they apply in your case, you need to check your terms and conditions of sale. These will normally be shown on the purchase order and invoice and/or in the sales contract.
They might provide for a cif price but for title to pass at the vessel, in which case you will be right. Or they might provide for a cif price and for title to pass at the buyer's nominated port, in which case your auditor will be right.
Sounds like...
... it's the legal literature, rather than the accounting literature, that you need to review since it is a legal matter when title passes.
But, if risk passes at the ship's rail, then surely title also passes at that point, because the risk is risk of loss, damage, theft etc (ie risk of loss of ownership).
If the buyer is insured (by endorsement) against these risks from the ship's rail, that only makes sense if he has title to the goods from that point.
So I would agree with you. But you probably need a commercial lawyer to determine the matter definitively.
Obsolescence of the term 'Ship Rail'
Dear all, just in case you guys are unaware the interpretation that the 'goods pass over the ship rail' is in essence the same as FOB. As the 'ship rail' is literally the railing that surrounds the ship. If goods were to 'pass over the ship rail', it means the goods are onboard. On a side note, Incoterm has specified that the term Ship Rail is no longer in use since 2010. Hence, FOB means that risk and rewards are transferred once 'goods board the ship'. As far as auditors are concerned, it is also the date stated on the Bill of Lading, as BoL are only issued once goods board the ship. Hope this clear things up!