Q176: Selling Incoterms CIF, we recognise the sale when the goods are onboard. Is this correct?

A176: The starting point with this question is that commercial terms in general, and Incoterms rules in particular, are not designed to be accounting triggers, and accounting matters are frequently dictated by local laws or accepted accounting practices. For example, if you were prepaid, then for VAT purposes ‘supply’ would have already taken place at the moment of payment, regardless of the underlying contract terms (with the narrowest of exceptions).

And, even if using Incoterms rules is allowed for accounting purposes, you must bear in mind that this is not what they are designed for, so you run the risk of using a tool that is not fit for purpose. These are the first issues.

However, assuming you wish to proceed, be cautious as there is a common misconception that a CIF contract is ‘delivered’ (that is to say, completed) when the goods are loaded on board the vessel when in fact this is not the case.

Consistent with all C-prefixed terms, CIF is the sale of documents, it is not the sale of the cargo that the documents may refer to. It is a well-established principle that the underlying goods may not be tendered by the seller to the buyer in place of the documents.

This is a point complicated by the poor wording used in Incoterms rules, which refers to ‘the goods’ (at A2 and B2 of the text of CIF). The documents, and not the goods, are the subject of the sales agreement.

Matters are further aggravated by the Incoterms obligation for the seller to ‘provide’ the buyer with a commercial invoice (the Cost); ‘provide’ the buyer with the insurance certificate (the Insurance) and ‘provide’ the buyer with the transferable bill of lading (the Freight).

Contractual delivery therefore takes place when the seller has ‘provided’ the buyer with these documents. It is at that moment (if any) that the sale is achieved. But, when using Incoterms rules, you are still left to contemplate the meaning of the word ‘provide’, although it is unlikely to equate to the seller merely ‘having’ the documents available.

Under common conditions, the seller might have the commercial invoice and insurance certificates in advance of shipment but would only expect to hold the on-board bill of lading (as this is CIF, consigned ‘to order’), three or four working days after the vessel has sailed.

If the word ‘provide’ is interpreted as meaning that this set of commercial documents must be ‘received’ by the buyer, then the seller would only ‘recognize the sale’ when the buyer has the papers to hand. Reading, understanding and interpreting the commercial term is a crucial requirement for any seller wishing to use commercial terms in general, perhaps more so when wishing to use them as an accounting trigger. It would be folly to use the terms casually, without understanding their meaning.

The original contract term c.i.f. predates Incoterms rules by a generation, and there are many interpretations of the term other than the Incoterms Rules CIF, which is at best a ‘short form’ version.

The more expansive Warsaw-Oxford Rules for c.i.f. contracts allows for the bill of lading to be a ‘received’ for shipment document, rather than one evidencing the later ‘shipped on board’ event. Under the American Uniform Commercial Code, delivery in a C.I.F. contract occurs when the goods are “placed into the possession of the carrier” in that “delivery to the carrier is delivery to the buyer.”
Using either of these definitions the seller may claim ‘delivery’ earlier than under the Incoterms rule, which alone requires actual loading on board and shipment. This becomes an important distinction in the event of a delay in loading and/or shipment.

The Warsaw Oxford Rules for c.i.f. contracts are much clearer than the CIF Incoterms rule generally, and specifically in the matter at hand, in that delivery is defined as being “…the moment when the seller delivers the documents into the hands of the buyer”, (Rule 6, Property). Less accurately, the American terms require the seller to “forward and tender, with commercial promptness, all documents in due form.” [28:2-230 (2)(e)]

In either case, the buyer must have the documents.

In summary. It is not incorrect to use commercial terms as accounting triggers, but it is inappropriate. In a C-prefixed contract, the seller must place the documents in the possession of the buyer (although this is perhaps only one definition of the word ‘provide’ used in Incoterms rules). In all examples, the goods being loaded on board the vessel, or the seller’s possession of a document evidencing this, are insufficient to allow the seller to claim contractual delivery.

As loading on board is not the correct ‘trigger’ to evidence the completion of the seller’s contractual obligations to the buyer, it follows that it would be unsupportable under any reading of the rule to use it as the moment when the seller recognizes the sale.