What is Incoterms?

1691 reads · Last updated: December 5, 2024

To facilitate commerce around the world, the International Chamber of Commerce (ICC) publishes a set of Incoterms, officially known as international commercial terms. Globally recognized, Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers.Parties involved in domestic and international trade commonly use Incoterms as a kind of shorthand to help understand one another and the exact terms of their business arrangements. Some Incoterms apply to any means of transportation, while others apply strictly to transportation across water.

Definition

Incoterms, short for International Commercial Terms, are a set of international trade terms published by the International Chamber of Commerce (ICC). These terms are globally recognized and help prevent confusion in foreign trade contracts by clarifying the responsibilities of buyers and sellers.

Origin

Incoterms were first published by the ICC in 1936 to provide a standardized language and framework for international trade. As global trade became more complex, these terms have been revised multiple times to adapt to the changing business environment, with the latest revision in 2020.

Categories and Features

Incoterms are divided into terms applicable to any mode of transport and those applicable only to sea transport. The former includes terms like EXW (Ex Works) and FCA (Free Carrier), while the latter includes FAS (Free Alongside Ship) and FOB (Free On Board). Each term specifies the exact responsibilities of buyers and sellers regarding transport, insurance, liability, and costs.

Case Studies

Case 1: A U.S. company entered into a contract with a German company under CIF (Cost, Insurance, and Freight) terms. Under CIF, the U.S. company is responsible for paying for transport and insurance until the goods reach the German port. Case 2: A Chinese company used FOB terms in a transaction with an Australian company. Under FOB, the Chinese company is responsible for loading the goods onto the ship, after which the responsibility and costs transfer to the Australian company.

Common Issues

Common issues investors face when using Incoterms include misunderstandings and misapplications of the terms. For example, failing to correctly understand the division of responsibilities under CIF and FOB can lead to unexpected costs and liabilities. It is advisable to thoroughly study the terms and consult professionals before signing contracts.

Suggested for You

Accountant Responsibility

Accountant responsibility is the ethical responsibility an accountant has to those who rely on their work. According to the American Institute of Certified Public Accountants (AICPA), accountants have a duty to serve the public interest and uphold the public trust in the profession. An accountant has a responsibility to his clients, his company's managers, investors, and creditors, as well as to outside regulatory bodies. Accountants are responsible for the validity of the financial statements they work on, and they must perform their duties following all applicable principles, standards, and laws.

Accounting Principles

Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data. These rules make it easier to examine financial data by standardizing the terms and methods that accountants must use.The International Financial Reporting Standards (IFRS) is the most widely used set of accounting principles, with adoption in 167 jurisdictions. The United States uses a separate set of accounting principles, known as generally accepted accounting principles (GAAP).

Howey Test

The Howey Test is four criteria an asset must meet to qualify as an "investment contract." If the asset is an "investment of money in a common enterprise, with a reasonable expectation of profits to be derived from the efforts of others" it is considered a security. It is then subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.The test applies to any contract, scheme, or transaction. The Howey Test is important for evaluating blockchain and digital currency projects when developers are fundraising. Certain cryptocurrencies and initial coin offerings (ICOs) may be found to meet the definition of an "investment contract" under the test.

Jurisdiction Risk

Jurisdiction risk refers to the risks that can arise when operating in a foreign country or jurisdiction. These risks can arise simply by doing business, or else by lending or borrowing money in another country. Risks could also stem from legal, regulatory, or political factors that exist in different countries or regions.In recent times, jurisdiction risk has focused increasingly on banks and financial institutions that are exposed to the volatility that some of the countries where they operate may be high-risk areas for money laundering and terrorism financing.

Zoning Ordinance

A zoning ordinance is a law or regulation enacted by a government to manage and regulate land use. The primary purpose of zoning ordinances is to ensure the rational use of land, protect public interests, and promote urban planning and development by dividing land into different use zones (e.g., residential, commercial, industrial).

Shell Corporation

A shell corporation is a corporation without active business operations or significant assets. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public. Legitimate reasons for a shell corporation include such things as a startup using the business entity as a vehicle to raise, funds, conduct a hostile takeover or to go public.