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Incoterms

2010 rules:
Whats new and what you need to know
Casey Ochs CDCS
Wells Fargo Trade Services Manager
November 1, 2010
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reference purposes only. Our information is based upon sources that we believe
to be reliable, though the information is not guaranteed. Wells Fargo & Co. and its
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structure of your transactions and your related needs. Please contact your
investment, financial, tax, legal or business advisor regarding your specific needs
and situation. 2010 Wells Fargo Bank, N.A. Member FDIC. All rights reserved.
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Incoterms

2010 rules:
Whats new and what you need to know
International Commercial Terms first released by the
ICC in 1936
Purpose: simplify drafting of international contracts
and bring standardized definitions and
understanding to international trade and terms of
sale
Periodically updated to keep pace with changes in
trade practice: 1990, 2000, 2010
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Events since 2000 affecting global trade
In 2004, shipment and delivery terms were deleted
as from UCC Article 2
Sarbanes-Oxley: greater need for clarity in revenue
and expense recognition in the post-Enron world
Increased port and compliance regulations in the
USA and globally in the post-9/11 world
President Obama set goal of doubling U.S. exports in
next five years
European Union expansion and Euro circulation
China joined WTO, biggest global exporter
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The Incoterms committee
2.5 year process
Drafting group
Primarily Europeans (Frank Reynolds only American)
Mostly lawyers
Roughly 2,000 comments from more than 30 countries
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Whats new?
New layout - divided into two distinct sections
Any Mode terms: DDP, DAP, DAT, CIP, CPT, FCA, EXW
Waterway/Maritime terms: FOB, FAS, CFR, CIF
Includes explanation of terms used in the book
11 terms (down from 13)
DAF, DES, DDU and DEQ have been removed and replace by
DAP and DAT respectively
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Whats new? (contd)
Graphics added to illustrate risk and obligation
related to each Incoterm
Incoterms 2010 now defines itself as rules
Multiple language translations
Effective as of January 1, 2011
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What do Incoterms do?
Incoterms rules do say which party to the sale contract has
the obligation to make carriage or insurance arrangements,
when the seller delivers the goods to the buyer, and which
costs each party is responsible for. (Incoterms

2010 rules
page 6)
New rules apply to both international and domestic sales
For example, DDU has been eliminated and replaced by DAP
Define responsibilities of parties - reducing misunderstanding in
contracts
Can be used as a guideline to determine risks, responsibilities
and obligations for sellers and buyers
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What dont Incoterms do?
Dont address transfer of title or ownership of the
goods!
Ownership should be addressed in the contract
if it is not, then it may become subject to applicable law
If no Incoterm is specified, the transaction defaults subject
to the UCC
Which may contradict foreign law
Ownership in foreign trade is usually determined by other
factors such as negotiable documents
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What dont Incoterms do? (contd)
Dont directly deal with revenue recognition
GAAP, IFRS (International Financial Reporting Standards)
and other rules, however, do touch on issues specifically
dealt with by the Incoterms, such as control, delivery and
risk transfer
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More thoughts on revenue recognition and
Incoterms
When does the sale become a receivable under
GAAP, IFRS rules?
Sarbanes-Oxley has made strict adherence to
accounting regulations more important
Delivery as defined in the Incoterms rules, is a
factor in revenue recognition
Important to use the terms correctly and understand their
implications
Talk to your accountant!
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What dont Incoterms do? (contd)
Incoterms do not:
Use ships rail as a delivery point for CFR, CIF and
FOB any more
Big change from previous editions
This delivery point should be defined in the contract or sales
agreement (What defines loaded on board?)
Define how packages are to be stowed within a
container
Automatically default to use if not specified in the
contract of sale Dont assume!
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What dont Incoterms do? (contd)
Incoterms do not:
Specify the type of loading or unloading used in
various forms of transport
Deal with remedies for breach of contract
Constitute payment terms
Incoterms are are not law
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So, what happened to DAF, DES and DDU?
These three terms have been replace by one term
DAP (delivered at place)
DAF (delivered at frontier): rarely used and limited to
ground transport
DES (delivered ex-ship): limited to water shipments only
DDU (delivered duty unpaid): not appropriate for domestic
shipments since duty was implied and therefore irrelevant
DAP can be used with any mode of transport -
domestic or international
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So, what happened to DEQ?
DEQ (delivered ex-quay) replaced by DAT (delivered
at terminal)
DEQ was limited to water or maritime transport
DEQ required the seller to unload at the quay
DAT
Requires the seller to unload at a quay, terminal or
warehouse
Can be used with any mode of transport
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Some definitions
transportation from the point or place of arrival on the side of the
buyer, to the buyers location, or another location on the side of the
buyer
On-carriage:
the main transportation moving the goods from the exporter/sellers
side to the importer/buyers side
ocean or air portion of an international shipment, for example
Main carriage:
transportation on the exporter/sellers side to the place, port or point of
departure before main carriage
Pre-carriage:
point where the risk of loss or damage to the goods passes from the
seller to the buyer (Incoterms

2010)
Delivery:
the party that contracts with the carrier
Shipper:
the party with whom the carriage is contracted (Incoterms

2010)
includes NVOCCs
Carrier:
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F terms: general considerations
Main carriage contracted by buyer
Less work for seller, but less control over documents
and documentation
For documentary payment terms
For U.S. exporters, EEI (Electronic Export Information)
filings are typically done by the forwarder
For U.S. importers, F terms facilitate ISF (Importer
Security Filing - 10+2) reporting
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C terms: general considerations
Most advantageous for seller
Main carriage contracted by seller
Most control over documents
More work for exporter than F terms
Under C rules, buyers are responsible for the goods
during the main carriage even though the vendor
has made the arrangements for main carriage
U.S. importers must rely on their suppliers
forwarder to submit 10+2 documentation
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D terms: general considerations
Arrival term
Main carriage contracted by seller
Seller responsible for goods until delivered
(arrived) to specified location on the buyers side
Not particularly advantageous if youre looking for early
revenue recognition
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D terms: additional considerations
For exporter: more work than the F terms and
greater risk than C terms
Seller agrees to deliver (make arrive) at the named
location on the buyers side
Potential for demurrage charges
For U.S. importers, again, the 10+2 filings are
handled by the vendors forwarder
Could pose additional risk
Not the best term to use for L/C transactions, since
the BL or AWB do not show actual arrival
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Any mode terms
EXW
FCA
CPT and CIP
DAP, DAT and DDP
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EXW (ex-works)
Any mode term
Least work for exporters
Popular among new exporters
Exporter/Seller makes the goods available for pickup (including
agreed packaging)
Is the packaging suitable for the shipment? How do you know?
Buyer responsible for loading goods at EXW place
How often does this actually happen?
If the vendor is loading, who takes responsibility if damage occurs?
Buyer responsible for export and compliance documentation
Seller must provide company info to buyers forwarder
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EXW and letters of credit
What happens if the buyer decides to instruct their
forwarder not to pick up the goods?
How irrevocable is your letter of credit?
What about custom-made goods?
Whos managing the documentation and
presentation process?
Do you want your customers forwarder preparing
documents you need to draw on your L/C?
What if the L/Cs confirmed?
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FCA (free carrier)
Can be used with any mode of transportation
Seller must deliver the goods to the carrier provided by the
importer/buyer at a named point on the exporter/sellers side
If no point is named the seller can choose a point best suited for
them
The named point can be the sellers facility
Seller is responsible for:
Packaging
Loading
Pre-carriage (if any)
Export clearance
Compliance documentation
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FCA (free carrier) (contd)
Seller not responsible for unloading on the side of
the buyer
Buyer responsible for everything else after loading
Insurance not specified
Freight collect
FCA should be considered as an alternative to EXW
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CPT (carriage paid to)
Can be used with any mode of transportation
Well suited for multimodal transport
Seller must clear goods for export including export
compliance documentation
Seller delivers goods, packaged for shipment, to
carrier for transportation to a named destination
place on the importer/buyers side
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CPT (carriage paid to) (contd)
Seller pays all transportation costs to specified
delivery destination main carriage
Risk, however, passes to buyer when goods are delivered to
carrier
Buyer typically responsible for unloading at place of
destination
Insurance not specified
Freight prepaid term
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CIP (carriage and insurance paid to)
Can be used with any mode of transportation
Well suited for multimodal shipments
Seller must clear the goods for export including
export compliance documentation
Seller delivers goods, packaged for shipment, to
carrier for transportation to a named destination on
importer/buyers side
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CIP (carriage and insurance paid to) (contd)
Seller pays for all transportation costs up to
specified delivery destination main carriage
Risk, however, passes to buyer when goods are delivered to
carrier
Buyer typically responsible for unloading at place of
destination
Insurance is sellers obligation (minimum coverage)
Make sure your insurance coverage is up to date!
Freight prepaid term
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More about insurance CIP and CIF
Seller obtains minimum cover
Institute Cargo Clause C
In the currency of the contract
The contract amount plus 10%
The insurance shall be contracted with the
underwriters or an insurance company of good
repute and entitle the buyer or any other person
having an insurable interest in the goods, to claim
directly from the insurer. Incoterms 2010 pages 46
and 110
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DAT (delivered at terminal)
Any mode (arrival) term, ostensibly replaces DEQ
Seller obtains export clearance and handles
appropriate export compliance documentation
Seller appropriately packages goods for transport
and pays for all transportation costs to a named
destination terminal
Seller pays for unloading at the named destination
terminal on importer/buyers side
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DAP (delivered at place)
Any mode (arrival) term
Seller obtains export clearance and handles
appropriate export compliance documentation
Seller appropriately packages goods for transport
and pays for all transportation costs to a named
destination place on importer/buyers side
Buyer responsible for unloading goods at the named
place
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DAP (delivered at place) (contd)
Buyer responsible for import clearance and on
carriage (if any)
No insurance specified
Freight prepaid
Seller must provide appropriate documentation for
release of goods on importer/buyer side
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DDP (delivered duty paid)
Any mode (arrival) term
Not suitable for domestic shipments (duty doesnt
apply)
Seller arranges and pays for:
Transportation
Foreign duties
Export and import licenses
Export compliance documentation
Seller clears goods through customs in foreign
country for delivery to a named place on the
importer/buyers side
May be foreign exchange risk
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DDP (delivered duty paid) (contd)
Risky for exporter
Dealing directly with foreign customs and government
agencies
Buyer typically responsible for unloading at the point
of delivery
Insurance not specified
Freight prepaid
A buyer under DDP is not the importer of record,
since they are not clearing the goods through
customs
If youre an importer how does this affect drawback
considerations?
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Sea and inland waterway transport terms
FAS
FOB
CFR
CIF
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FAS (free alongside ship)
Sea and Waterway term
Usually used for charter party transactions (not
conference line containerized shipments)
Seller delivers the goods, commodity, or product,
packaged or prepared for export alongside a vessel
designated by the buyer at a named place/port on
the sellers side
Seller responsible for export clearance and export
compliance requirements
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FAS (free alongside ship) (contd)
Buyer responsible for:
Loading the vessel
Main carriage
Clearance through customs
On-carriage
Insurance not specified
Freight collect
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FOB (free on board)
Sea and Waterway term (not to be confused with
UCC term FOB)
Seller delivers the goods packaged and prepared for
export, loaded on-board a vessel chosen by the
buyer, at a port on the exporter/sellers side
Seller is responsible for:
Export compliance requirements
Export clearance
Pre-carriage
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FOB (free on board) (contd)
Over the ships rail is no longer used as a point to define
transfer of risk from seller to buyer
Buyer and seller should agree on what constitutes loaded on board
Different products loaded differently
Seller responsible for performance of carrier loading the ship even
though carrier is chosen by the buyer
Buyer responsible for:
Main carriage
Import clearance
On-carriage
Freight collect
Insurance not specified
Common Incoterm for L/C transactions
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CFR (cost and freight)
Sea and Waterway term
Seller delivers goods, packaged for shipment, to
carrier for transportation to a named destination
port on the buyers side
Risk passes to buyer when goods delivered to carrier
Seller:
Chooses vessel
Pays costs for main carriage
Handles export clearance and compliance requirements
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CFR (cost and freight) (contd)
Over the ships rail no longer used to designate
transfer of risks to buyer from seller
Buyer responsible for:
Vessel unloading
Import clearance
On-carriage
Freight prepaid
Insurance not specified
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CIF (cost insurance and freight)
Sea and Waterway term
Seller delivers goods, packaged for shipment, to
carrier for transportation to a named destination
port on the importer/buyers side
Risk passes to buyer when goods delivered to carrier
Seller:
Chooses vessel
Pays costs for main carriage
Handles export clearance and compliance requirements
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CIF (cost insurance and freight) (contd)
Over the ships rail no longer used to designate
transfer of risks to buyer from seller
Buyer responsible for:
Vessel unloading
Import clearance
On-carriage
Freight prepaid
Seller arranges minimum insurance coverage
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Your pro-forma invoice (quote): the basics
Pro-forma invoice should:
Be dated and numbered
Note the buyers request or inquiry
Contain the correct name and address of buyer and seller
Describe the goods with prices, totals and currency
Have the correct Incoterm
Show the payment terms
Show the origin of the goods
Any other pertinent information related to the transaction
Tell the buyer what the seller is willing to do and at what price
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Your contract or sales agreement: the basics
Terms of payment and price
Specific ports of loading and discharge places of receipt and
arrival
Address passing of title
Description of goods and packaging (possibly HTS codes)
Incoterm
Who does what when - timeline
Applicable law and address resolution of disputes
Correct addresses of buyer and seller contact information
Whatever is not covered in your contract may be decided by
default from the UCC
These default provisions are found in Article 2 of the UCC
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Incoterms and your sales contract
Avoid misunderstandings in your commercial
transactions!
International transactions carry their own set of hurdles
Language, culture, time zones, different points of view
Correct Incoterms usage can alleviate these issues
Incorrect Incoterms usage can exacerbate these issues
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Incoterms and documentary payment terms
C terms allow seller to easily obtain documentation
EXW shipments require that the seller depend on the
buyer/agent for shipping documents
FCA is suitable for truck shipments and received for
shipment documents
D terms may not be the best choice for letters of
credit since the BL does not show arrival dates at
the buyers side
Sea and Waterway terms allow for the acquisition of
an on-board or received for shipment BL
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Conclusion
Incoterms rules are essential to avoid
misunderstanding in sales contracts
Incoterms can affect revenue recognition
Incoterms can affect your bottom line
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Resource Sites and Publications
http://www.iccwbo.org/
http://www.commerce.gov/
https://www.wellsfargo.com/inatl/inatl.jhtml
Incoterms 2010 (ICC Publication 715E)
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Incoterms 2010
Seller Seller Seller
DDP (delivered duty paid)
Seller Seller Seller
DAP (delivered at place)
Seller Seller Seller
DAT (delivered at terminal)
Arrival, freight prepaid
Buyer Seller Seller
CPT (carriage paid to)
Buyer Seller Seller
CIP (carriage and insurance paid to)
Main carriage freight prepaid
Buyer Buyer Buyer
FCA (free carrier)
Main carriage freight collect
Buyer Buyer Buyer
EXW (ex-works)
Departure, freight collect
Risk
Main
Carriage Control
Any Mode Terms
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Incoterms 2010
Buyer Seller Seller
CIF (cost, insurance, freight)
Buyer Seller Seller
CFR (cost and freight)
Main carriage freight prepaid
Buyer Buyer Buyer
FOB (free on board)
Buyer Buyer Buyer
FAS (free alongside ship)
Main carriage freight collect
Risk
Main
Carriage Control
Sea, Inland Waterway
Transport Terms