Incoterms deals with several aspects of trade such as :
- General obligations
- Transfer of risks
- Delivery and transportation documents
- Export clearance
- Import clearance
- Cost allocation between buyer and seller
- Packaging, checking and marking
However, they do not deal with or define the transference of title or revenue recognition in a trade.
However, companies often choose to link the point of delivery, to the point of title transfer, to the point of revenue recognition for the sake of simplicity. When this is the case, the point of delivery defined in the Incoterms becomes important, as this becomes the point of reference for title passing from seller to buyer and for the seller to recognize revenue from the sale.
To put to rest a common misconception, the terms do not specify that delivery equates to title transfer.
In addition, here are a few other things that the Incoterms do NOT do:
- Dictate the mode of transport
- Over-ride the sales contract
- Over-ride local regulations and laws
- Define the payment mode
- Define the payment currency
- Define the FX rate to be used
- Define the remedies available for conflict resolution
- Define the jurisdiction of law for legal cases
- Define how sanctions should be dealt with
- Define who should pay for post clearance audit penalties
- Define who should pay for returns
- Define how intellectual property rights should be dealt with
- Define how patent rights should be dealt with
- Determine the amount of tariff to pay
- Determine the cost allocation arising from force majeure events
- Define the liabilities arising from late delivery or non delivery of cargo
A final note about Incoterms and title transfer
Many traders assume that that title transfer is the same as the point of delivery. However, this is not always the case. For example, in consignment sales the title cannot transfer at the time of delivery. The basis for recognizing revenue in the various transaction models that a company deals with, should be defined separately and documented for purposes of responding to Customs and tax audits.