Letter of Credit Forum

Hi Blur,

Firstly, let's do away with CIF and replace it with CIP. CIF is only to a port of discharge not a place of destination, as is DDU. The essential differences between CIP and DDU, both to the same place, even though the cost to the seller will be the same is the matter of risk whilst the goods are in transit.

With CIP as soon as the seller hands the goods to the first carrier the seller's risk ceases and it becomes the buyer's risk. However the seller must provide the buyer with insurance cover for that risk such that the buyer can claim against the seller's insurance.

With DDU, the seller bears the risk until delivery, which generally can cause problems for the seller to claim against his own insurance in a foreign country. In your case that won't be a problem.

My understanding (very basic) of the international accounting rules is that you cannot take up the debt under DDU until you have performed by delivering the goods at destination.

The other problem you face is that DDU is almost always incompatible with payment by L/C as typically an L/C calls for presentation of an on board B/L and most issuing banks will also call for an insurance certificate. Therefore even if it calls it DDU it actually performs as CIP. Under DDU a payment by L/C would become a pre-payment until you deliver at destination and can take the debt up in your books (even though you no longer hold the negotiable B/L to hand over at the destination to arrange delivery and if loss or damage were to occur then you would have signed over your right to claim against your own insurance).

And of course, as of 1 Jan 2011 DDU gracefully disappears from the world stage, to be lumped in with a couple of other disappearing terms to re-emerge as DAP.

And lastly, what chance that your USA supplier understands Incoterms and L/Cs anyway?

Bob

Hello Blur
Incoterms (r) rules were not developed with revenue recognition in mind. This does not mean to say that you cannot use them for this purpose, by you could also use any other trigger too.
So, when you account for revenue recognition is more to do with understanding what passes for commonly-accepted accounting practices in your country.
The second point is that the shipper in the bill of lading is a function outside of Incoterms (r) rules. What I mean is that Incoterms (r) rules do not cover the position of the shipper – only that of the seller (and buyer).
So, in Incoterms (r) rules how you address the shipper on the bill is not relevant (it is relevant in the Incoterms (r) CIF rule that the bills consigned ‘to order’ though, unless the seller and buyer decide otherwise in their contract).
The point that you do not appear to note is that under D-prefixed Incoterms (r) rules, the sellers only intend to deliver, to complete their obligation, on delivery, whereas as a general proposition, the beneficiary in a credit intends to get paid on presentation of documents evidencing dispatch of the goods (which is more consistent with C-prefixed terms, whether Incoterms (r) rules or otherwise.

I would suggest you go back on pace and look again: what is your intention? Do you want to sell cargo – that is do you wish to be accountable for the condition of the delivered goods. If so, then you are looking at a D-prefixed Incoterms (r) rule, the contract is a liability until it is delivered i.e. you have no right to demand payment unless the goods arrive at the named place, I suggest delivery is the trigger for revenue recognition and I further suggest you need to look at some other instrument rather than a credit.
If, on the other hand, you want to sell paper, then the Incoterms (r) rule CIF will work (as would any Incoterms (r) rule with a C-prefix). Under the Incoterms (r) rule CIF you could recognise revenue on shipment, work with a credit and so forth (Although if costs are to be disbursed for transport to an inland ‘mine’ it is more likely that the Incoterms (r) rule CIP would be more appropriate – the Incoterm (r) rule CIF terminating costs at a sea port of arrival.)

Just some thoughts – also an exercise in writing “Incoterms (r) rules” which is the demanded method of expression put out by the ICC for Incoterms (r) 2010...and rather cumbersome I found it too.

(Final point – Incoterms (r) DDU rule falls away with effect from the 1st of January and the Incoterms (r) DAP rule would be correct (if to the inland mine) for 2011.)

cheers

phill doran

 ...thus: another step on the road to mercantile enlightenment...