How to detect some early financial warnings in companies

TRADING volume on the stock market has recently been getting higher again. Some retail investors, who were absent from the recent rally, have started to get excited.

Over the past few months, investors were mainly focusing on good quality stocks, selling at a cheap level. However, attention has started to switch to poor quality stocks lately. Even though sometimes investors may be able to make money by betting on those stocks, we still need to be careful about the fundamentals of the companies. In this article, we will look at how to detect some early financial warnings.

A lot of companies like to make corporate announcements during the bull market. We agree that some of the announcements were genuine, but many corporate proposals were simply too good to be true.

If we analyse further, we will notice that the proposals might be way beyond the capabilities of the companies. Sometimes, the management’s projections of sales and profits were far beyond the past history. The capital expenditure requirements were well above the companies’ borrowing capacities.

Besides, the time required to turn the projects into profits might be too long. Nevertheless, as a result of the announcements, the stock prices would surge and normally, the main sellers behind might be the key owners.

We have also seen some proposals that turned out to be profitable. The companies did make profits in the first few years. However, the high growth in expansion stretched the capabilities of the top management, who might not have the experience and ability to run big businesses. They might have the experience to manage RM100mil turnover businesses. However, when the turnover surged beyond RM1bil per year, they might have problems. In fact, the main concerns to the companies were the top management team which lacked skills and experience to run big businesses.

We need to be careful if there are any changes to the key managers of the companies, auditors or accounting firms. The key managers are referred to the positions like chief executive officers and financial controllers. Besides, frequent changes in auditors provide serious financial warnings, especially the change from a reputable audit firm to an unknown one.

How to smell a rat or how to detect some early financial warnings in companies

Companies will soon start to report their financial results for the period ended Sept 30. In Malaysia, often good companies will try to announce their results before the deadline of Nov 30. However, if they are having difficulties in providing their financial statements, normally, we will expect some bad news to be announced. One of the possible explanations behind the delay is that the companies need more time to rectify certain financial problems.

Another potential sign of financial warning is when the companies venture into unrelated businesses. Previously, we saw many Bursa Malaysia second board companies going into financial distress in 1997/98 when they departed from their core businesses in manufacturing and ventured into property development activities.

We need to understand that when the company owners enter into areas that are not their core competencies, they might not be able to apply the knowledge and experiences accumulated previously. Instead, they would have to go through the entire learning curve again, which would result in the management taking a lot of time in managing those unrelated businesses.

In such situations, investors will need to pay attention and analyse whether those new ventures will be able to add value to the shareholders’ wealth. Some companies like to change their names after venturing into new businesses. Too frequent name changes may also imply that the companies have been shifting their core business focus and directions, which may not be good news to the shareholders.

Litigation is also another warning sign. We need to pay attention to companies that are involved in litigations, which may be either attributed to the companies being sued or they are suing someone else. These litigations may divert the management’s attention from day-to-day business operations. As a result, they may affect the companies’ performance as well.

One of the common questions asked by shareholders during any AGM is the directors’ fees. We need to analyse whether the fees paid are in proportion to the companies’ profitability. Sometimes, certain companies make excessive perks for owners as well as their employees or the lifestyle of the key owners is simply not consistent with the companies’ profitability.

The above are a few of the more common financial warnings that potential or existing shareholders must pay attention to when analysing the companies for investment. More importantly, we need to remain vigilant at all times and pay attention to the latest development of the companies.

Source: StarBiz

Maritime Laws in Malaysia

The following is a partial list of Malaysian maritime rules, regulations and laws:

. The Merchant Shipping Ordinance, 1952

. Boat Rules, 1953

. Contingency Plan for Straits of Malacca-Oil Spill Control

. Contingency Plan for Oil Spill Combat Team

. Environmental Quality Act 1974

. Exclusive Economic Zone Act 1984

. Federation Ports Rules, 1953

. Fisheries Act, 1985

. Light Dues Act 1953

. Merchant Shipping Act (Oil Pollution), 1994

. Merchant Shipping Examination for Certificate of Asean Oil Spill Response Action Plan (ASEAN OSPAR)

. Merchant Shipping Examination for Certificate of Competency (Deck) Rules 1998.

. Merchant Shipping Examination for Certificate of Competency (marine Engineer Officers) Rules 1998.

. Merchant Shipping Order (Collision Regulations), 1984

. Merchant Shipping Order (Collision Regulations) (Rules for Vessels Navigating Through Straits of Malacca and Straits of Singapore)

. National Contingency Plan - Oil Spill Control

. Petroleum Rules (Safety Measures)(Transportation of Petroleum by Sea), 1985

. Petroleum (Safety Measures) Act 1984

. Port (Safety of Workers) Rules, 1985

. State Ports Rules

Errant operators give direct selling business a bad name

SALES growth in the domestic direct selling industry has remained stagnant in recent years due to unscrupulous operators out to make a quick buck, says Malaysian Direct Distributors Association (MDDA) president Datin Sylvia Koh.

The sector saw sales of RM8 billion in 2006, but the numbers have been on the decline since. Sales were RM5.6 billion in 2007, and RM5.5 billion last year.

Koh blamed unscrupulous operators for tarnishing the image of registered direct sellers, attributing the drop in sales volume to negative perception among consumers about the direct selling business.

"They (unscrupulous operators) are giving us a bad name. Consumers are having negative perceptions due to this group's irresponsible activities," she told Business Times in an interview.

Koh was referring to a spate of scams such as the pyramid-type of business and get-rich-quick schemes that were purportedly linked to the direct selling industry.

"Consumers now are sceptical about direct selling companies. These irresponsible activities are actually mostly done by illegal and unregistered direct selling companies," she said.

Koh noted that out of the 100 complaints of cheating lodged with the Domestic Trade, Cooperatives and Consumerism Ministry, 90 were found to be committed by unregistered companies and 10 by registered companies, out of which only one is a member of the MDDA.

Currently, there are 670 direct selling companies registered with the ministry, although less than 20 per cent are members of the MDDA and its counterpart, the Direct Selling Association of Malaysia (DSAM).

"We have about 60 members, and DSAM has about the same figure. We hope to be able to attract more than 50 per cent of the registered companies to become our members or DSAM's," Koh said.

With this in mind, the MDDA will launch its homepage on Wednesday, which will be officiated by Domestic Trade, Cooperatives and Consumerism Minister Datuk Seri Ismail Sabri Yaakob.

"They (consumers) would be able to check whether the products and services offered to them are from the registered or legal direct selling companies as the website will provide a full list of MDDA members for them to counter-check," Koh added.

Koh expressed confidence that the direct selling industry in the country would prosper in future.

"Bear in mind that Malaysia is currently ranked 12th in terms of sales in the direct selling business worldwide. The potential here is huge," she said.

Source: Business Times

Global funds to focus corporate governance

GLOBAL investment funds are expected to pay more attention to corporate governance in Malaysia in line with their focus on investments in the country and the rest of Asia.

Secretary general of the Asian Corporate Governance Association, Jamie Allen, said the funds were expected to intensify their focus on Malaysia in the next few years.

"While Malaysia has made significant progress in terms of corporate governance, particularly in terms of better regulation, there are still areas that can be further improved," he said at a seminar on ''Governance Expectations of International Fund Managers'' organised by Bursa Malaysia in Kuala Lumpur today.

Allen said global investors looked forward to better information being given to make decisions during shareholders'' meetings.

"One of the problems is that investors do not get enough information, like the complete biodata of director."

"Another area that needs improvement is the voting system at companies'' meetings," he said.
He said voting by poll rather than through show of hands was better as it would promote efficiency and corporate governance.

Source: Business Times

Carriage of Goods by Sea

For a country with a significant sea-faring tradition and a substantial number of merchant fleets, Malaysia's maritime laws can appear to be anachronistic. The Malaysian Carriage of Goods by Sea Act ("MCOGSA") and Merchant Shipping Ordinance have hardly been reviewed since their respective enactments many decades ago. Moreover, by virtue of the Malaysian Civil Law Act, the English Bill of Lading Act (which dates back to the 19th century!) applies to Malaysia even though the United Kingdom has abandoned that statute in 1992.

Some pertinent issues involving international trade and, specifically, carriage of goods by sea, include:-

Bills of Lading ("B/L")

B/Ls are issued by the carrier/shipowner. They are usually signed by ship’s master.

B/Ls have 3 principal characteristics. First, it is evidence of receipt of goods by carrier.Second, it is a contract of carriage: s.4 MCOGSA. Third, it is prima facie document of title to goods (this is a defeasible title only because the buyer still has the right to reject goods under the Malaysian Sale of Goods Act ("SOGA").

A “Clean” B/L means goods received in perfect condition. A “Claused” B/L means goods may have defects as specified.

Bills of Lading Act (UK)

Repealed in UK (by the Carriage of Goods Act 1992 ("UKCOGSA") but still valid for Peninsular Malaysia under s.5(1) Civil Law Act. The Bill of Lading Act may not be applicable to the states of Sabah and Sarawak due to the operation of s.5(2) Civil Law Act.

The Bill of Lading Act is disadvantageous to the position of the buyer for the following reasons. First, the buyer has no privity of contract with carrier. Second, the buyer only assumes risk to goods. This enables the buyer can insure the goods but the buyer has no contractual standing to sue carrier. There is no privity of contract since the privity is between the vendor and the carrier. Third, the buyer can only sue after receiving the B/L. This is disdvantageous in the FOB delivery situation.

If the transport document is not a B/L e.g. a document called a Mate’s Receipt, the buyer cannot rely on the Bill of Lading Act for protection.

Comparison between the Hague, Hague-Visby & Hamburg Rules

Before 1924, the Common Law regime imposed ABSOLUTE liability for carriers, making carriers liable for the vessels' seaworthiness throughout the voyage. Unfortunately, during the deliberations to establish the Hague Rules, the merchant marine used their superior bargaining power to lobby for provisions that enabled carriers to contract out of common law liability. This was a set-back for international trade. This weakness was reflected in the Hague Rules (1924).

The Hague Rules were modified by amendments that became known as the Hague-Visby Rules which increased carrier's liability.

The most recent revamp was the Hamburg Rules that increased carriers' liabilities even further.

Readers should note that MCOGSA adopts Hague Rules while the UKCOGSA adopts Hague-Visby Rules. Countries like Singapore and Australia has adopted the Hamburg Rules.

Contracting out of liability of carriers – Hague (may be possible to contract out), Hague-Visby & Hamburg does not allow. In Hollandia Denning LJ said carriers cannot contract out of liability under H-V Rules.

• Duration of liability – Hague & Hague-Visby (only at time of commencement of voyage), Hamburg (throughout voyage – returns to common law position).
• Liability for deviation from route – Hague & Hague-Visby (no liability), Hamburg (liability).
• Liability of cargo-owner to inform about dangerous goods – Hague & Hague-Visby (no liability), Hamburg (cargo-owner liable for non-disclosure).
• Limitation period – Hague (1 year), Hague-Visby (1 year but can be extended by mutual agreement – must be clear, Hamburg (2 years).
• Liability of cargo-owner for freight & demurrage – Hague & Hague-Visby (cargo-owner liable even if B/L silent on this), Hamburg (cargo-owner not liable if B/L silent).
• Application to documents other than Bills of Lading – Hague (does not apply to non-bills of lading), Hague-Visby (can apply to any non-negotiable receipt but document must expressly say that H-V Rules apply), Hamburg (applies to any transport document for carriage of goods by sea).
• Particulars of goods in B/L – Hague (minimum requirements), Hague-Visby (more details than Hague), Hamburg (most number of particulars).
  

Observations

Malaysia’s reliance on the Hague Rules may be because it wants to protect the local merchant fleet. But if Malaysia aspires to be a modern maritime nation it must review the MCOGSA to adopt, at least, the Hague-Visby Rules. This will make Malaysian merchant fleet more attractive to foreign shippers/cargo-owners.

Since the Hamburg Rules protects the shippers/cargo-owners most countries with merchant fleet that adopt the Hamburg Rules may be the most attractive to shippers.

CIF 2: Cost, Insurance & Freight

This is a term used in the international sale of goods. CIF only specifies delivery terms and sets out the obligations of the seller and buyer respectively. CIF is, thus, only a part of the sale contract that pertains to delivery terms.

The norm is for the buyer and seller to rely on the International Commercial Terms also known as Incoterms prepared by the International Chamber of Commerce, ICC. Incoterms reflect current trade custom and practice and, it applies only to seaborne transportation of goods.

The CIF seller must arrange and bear cost of carriage of goods, marine insurance, customs clearance. All these costs will form part of cost of goods to the buyer.

Delivery of goods and delivery of title via shipping documents
CIF terms deal with the delivery of goods. But it also deals with the delivery of shipping documents. This was confirmed by the case authority of Kwei Tek Chao by the judge, Lord Devlin.

This is a good and practical mercantile law because it enables the buyer to re-sell goods upon receiving documents even before the physical goods arrive. And, the buyer can use shipping documents as security for banks to issue trade finance facilities such as the Letter of Credit to pay for the goods.

In the CIF-type situation, the buyer has 2 rights of rejection. First, the buyer can reject goods . Second, the buyer can reject documents.

Note that the right of rejection must be based on material non-conformity. If the non-conformity is too insignificant, the de minimis rule applies.

Most countries have laws that gives the buyer right to examine goods for conformity with description, or sample.

Note also that most countries have laws that imply a condition on quality, fitness and merchantability.

Shipping documents
Shipping documents referred to in the CIF clause includes the Bill of Lading, marine insurance certificate and invoice.
..
The Bill of Lading has 3 important characteristics. First, it is a document of title – but title is defeasible until payment is received for the goods.

Second, the Bill of Lading is regarded as evidence of receipt of the goods by carrier. In most cases, the Letter of Credit will be paid based on the condition that the Bill of Lading must be clean which means that the goods were received in good condition by the carrier.

Third, the Bill of Lading is the contract of carriage. Since the Bill of Lading is issued to the seller, the issue tends to be whether buyer has privity of contract to sue carrier if goods damaged.

Passing of Risk
Both buyers and sellers should note that risk passes to the buyer when the goods cross the ship’s rail. This was decided in the case of The Pyrene by Lord Devlin.

Receipt of shipping documents by the buyer gives the buyer a defeasible right to property until payment made. Deafisible means a qualified right of ownership that is subject to the payment being fully made for the goods bought. But defeasible title is enough for buyer to secure trade finace facilities using the shipping documents with a bank for the Letter of Credit.

Sale of goods laws in most countries state that where goods shipped using Bills of Lading, the seller is deemed to reserve right of disposal and the title does not pass to the buyer until full payment is received by the seller.

Under the CIF arrangement, risk passes from the buyer to the seller only when title in the goods have passed. And, as explained above, under CIF arrangements final title or ownership passes only when the seller receives full payment.

CIF: Cost, Insurance & Freight

Cost, Insurance and Freight (CIF) is a common term in a sales contract that may be encountered in international trading when ocean transport is used. It must always indicate the port of destination, ie "CIF Shanghai."

When a price is quoted CIF, it means that the selling price includes the cost of the goods, the freight or transport costs and also the cost of marine insurance. CIF is an international commerce term (Incoterm).

CIF is identical in most particulars with Cost and Freight (CFR), and the same comments apply, including its applicability only to conventional maritime transport.

Risk of loss of, or damage to, the goods is for the buyer, just as with CFR. However, in addition to the CFR responsibilities, the seller under CIF must obtain in transferable form a marine insurance policy to cover the buyer's risks of transit with insurers of repute. The policy must cover the CIF price plus 10 per cent and where possible be in the currency of the contract.

Note that only very basic cover is required equivalent to the Institute "C" clauses, and buyers should normally insist on an "all-risk" type of policy such as that under the Institute "A" clauses.

The seller's responsibility for the goods ends when the goods have been delivered on board the shipping vessel. In the guidelines for CIF published in Incoterms 2000 the term "carrier" does not appear and it clearly states "the seller must deliver the goods on board the vessel at the port of shipment" which makes CIF the incorrect term to use where the seller wishes their responsibility to end when they deliver the goods into the hands of a carrier prior to the goods passing the ship's rail at the port of loading. In the great majority of transactions the more correct term is CIP.

This term is only appropriate for conventional maritime transport, not ro/ro or international container movements.

FOB 2: Free On Board

Exporters of bulk cargo such as palm oil, oil and gas in resource-rich countries like Malaysia will typically receive purchase orders with a Free On Board (FOB) delivery term. These bulk goods are loaded onto large ships known as bulk carriers or tankers. Bulk carriers and tanker fleets flying the M'sian flag include those owned by the MISC, Tanjung Offshore, Global Carriers and Bumi Armada.

The M'sian legal framework on delivery terms for carriage of goods by sea is rather archaic. There may be valid governmental policy reasons for this laggard posture, namely, the liability risk protection of vessels flying the M'sian flag. The time may have arrived for M'sian policy makers to start examining and balancing the need to protect M'sian-registered vessels against the goal of making M'sian maritime companies more competitive in the international arena.

Furthermore, there are significant risk issues involving the relative liabilities of the shipping carriers, the insurer, the exporters and the overseas importer. Many companies tend to leave these matters in the hands of the lower management, supervisory and clerical staff when quarterly revews are probably necessary. These are tactical management issues to be considered.

This issue is a large one and, I am narrowing the discourse into a series of blog entries. This entry focuses on the FOB delivery term.

FOB: Delivery term

FOB is a standardized goods delivery term commonly used in international trade. The International Chamber of Commerce has standardized the definition of FOB through Incoterms.

The salient features of FOB sales under Incoterms 2000 are that, firstly, the seller merely delivers the goods to the ship. Secondly, the buyer is obliged to nominate the ship, if buyer fails to do so can nominate substitute ship within a reasonable time. And, thirdly, the risk for loss of or damage to goods passes from seller to buyer when goods cross ship’s rail (The Pyrene) or when loaded on board ship which deems delivery of goods by seller to carrier to be good delivery to buyer. Generally, neither party is obliged to arrange insurance.

In deciding on the case of Kwei Tek Chao, Devlin J. noted that an unusual feature of Cost, Insurance and Freight (CIF) sales is that there are 2 parallel “transactions”. First, there is a physical delivery of goods where the goods must either conform to sample or description failing which buyer has right to reject goods after examination. Second, it involves the delivery of shipping documents where the documents must conform strictly to the description in the letter of credit failing which the buyer has the right to reject the documents for non-conformity.

In the case of Ganda Edible Oil the M’sian Federal Court noted that in FOB sales that involve documentary credit payments, these 2 rights of rejection are also available to the FOB buyer.

Delivery of goods
Physical delivery of goods by seller to the ship completes the seller’s obligations with respect to physical goods. Consistent with Devlin J.’s finding in The Pyrene and Incoterms on the FOB seller’s delivery obligations – delivery is completed when goods cross the ship’s rail and loaded on board the ship.
..
Bills of lading (B/L)
In addition to delivery terms such as FOB, the contract for the carriage of goods is important. This carriage contract is evidenced by issuance of the B/L. The B/L has 3 characteristics as explained by Mustill LJ in The Delfini namely, the acknowledgement of receipt of goods by carrier, a document of title and, a contract of carriage of goods.

Under M’sian law B/Ls are governed by the English Bills of Lading Act 1855 (UKBLA) but the UK has moved since 1992 to a completely revamped Carriage of Goods by Sea Act to govern B/Ls and other carriage of goods contracts.

The UKBLA suffers from several disadvantages. Firstly, it recognizes only the B/L as the only form of carriage contract. Other carriage documents, for example, a mate’s receipt, are not protected by the UKBLA and, therefore, the endorsee can’t sue carrier.

Secondly, it links the right to property with right to sue, where right to property is transferred using different mechanism than B/L the endorsee may lose right to sue carrier. This is one of the judicial propositions from The Delfini.

Thirdly, it does not recognize the rights of part owners of unascertained bulk goods without benefit of transfer of property can’t sue carrier: eg Re Wait, Re London Wines. In such a case the “ascertainment by exhaustion” formula applied by Mustill J. in The Elafi is not available.

Delivery of documents
In FOB sales where documentary credit is used, as noted in Ganda Edible Oil, the right of the seller to demand payment arises when the shipping documents are delivered, even when goods are still at sea and, even when the goods have been lost at sea: Manbre Saccharine. The rationale may be that the buyer has recourse to insurance. But there must be actual delivery of goods on board a ship. If there were never any physical goods, seller has no right to claim payment: Hindley & Co v East India Produce.

Passing of risk
Although statutes on the sale of goods presumes that risk passes with property, which applies to “simple FOB” sales, for example FOB Incoterms that doesn’t involve documentary credit, under the “strict/classic FOB” and “FOB with additional services” the risk and property may pass at different times. However, in all FOB sales, risk passes when the goods cross the ship’s rail on The Pyrene principle. This gives the FOB buyer recourse to insurance for damage to or, loss of goods provided the FOB buyer takes up insurance coverage.

Passing of property
Legal scholars like Atiyah have noted that modern FOB sales are very similar to CIF sales in that documentary credit is widely used which requires the seller to retain title to goods. Thus retention of title by the FOB seller, as noted by Atiyah, is a function of securing payment by the buyer.

The general rule is that property passes in FOB sales when shipping documents are delivered and paid for by the buyer: The Aliakmon. Part payment is not good enough to transfer property in goods: Mitsui & Co v Flota Mercante. But since the seller arranges the carriage of goods, the B/L is issued in seller’s name, the seller has to indorse the B/L in favour of the buyer. This assumes that the goods are ascertainable.

First, where goods are unascertained, there must be an unconditional appropriation of the goods to enable property to pass from the seller to the buyer. Such issues often arise when the seller gets into financial or insolvency problems. One example is Carlos Federspiel where bicycles assembled and marked with buyer’s identification but remained at seller’s premises, the property couldn’t pass because FOB sales require goods to be delivered to ship. The appropriation was still conditional in that the seller could still change his mind. In contrast, in Hendy Lennox, the assembly of generators at seller’s premises in a Ex-Works sale with markings in favour of buyer was regarded as unconditional appropriation because all that was left was for buyer to arrange to collect the goods.

Second, the problem is made worse in bulk goods sales with several sub-buyers such as Re Wait and Re London Wines where part ownership of bulk goods are unappropriated & unascertained. Even if ascertained by the statutory sale of goods formulas, the sub-buyers can’t exercise independent rights of suit or obtain greater property rights. In UK the law reform in 1995 created a statutory formula to enable part owners of bulk goods to be given the statutory rights of “owners in common” of bulk goods. The legal anomaly still applies to M’sia.

Third, in international trade, sale of goods statutes operate to reserve title to property with seller. This was shown in the M’sian judicial decision in Shanti Kant where B/Ls made “to order” of timber logs could not pass to Indian buyer with a dubious claim. This allows the seller to ensure that payment is received before property in the goods is passed.

Fourth, in The Delfini, the buyer and seller had contractually agreed that property in the goods would pass upon delivery to the ship & that indemnities provided by the buyer would allow delivery of the goods. This is a situation similar to a “simple FOB” sale. Thus a sub-buyer on CIF terms could not claim against the carrier because it had no privity of contract in relation to the carrier. The B/L issued by the carrier was regarded by the English court of appeal, including Mustill LJ, as being a mere receipt for the goods. Since the goods had been delivered, the B/L could not be regarded as a document of title. In any case, property had passed to the buyer who could pass title to the sub-buyer independent of the B/L.

The Delfini was one of the cases that led to the repeal of the UKBLA in favour of the Carriage of Goods by Sea Act in 1992 that corrected the injustice in cases like The Delfini. M’sia remains under the UKBLA regime with all its defects.

Law reform proposition
There is a need for M’sia to consider adopting the statutory formula in the UK Sale of Goods Act and substitute UKBLA and Malaysian Carriage of Goods by Sea Act (which adopted The Hague Rules) with statutes for carriage of goods governing transport documents similar to the UK Carriage of Goods by Sea Act (which adopted The Hague-Visby Rules).

FOB: Free On Board

FOB is an abbreviation for Free On Board or Freight On Board. Generally, FOB deals with the shipping of goods. It specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability for goods lost or damaged in transit from the seller to the buyer. Precise meaning and usage of "FOB" can vary significantly. International shipments typically use "FOB" as defined by the Incoterm standards. Domestic shipments within the US or Canada often use a different meaning, specific to North America.

Under the Incoterm standard published by the International Chamber of Commerce, FOB stands for "Free On Board", and is always used in conjunction with a port of loading.Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods pass the ship's rail at the port of shipment.

For example, "FOB Vancouver" indicates that the seller will pay for transportation of the goods to the port of Vancouver, and the cost of loading the goods on to the cargo ship. The buyer pays for all costs beyond that point (including unloading). Responsibility for the goods is with the seller until the goods pass the ship's rail. Once loaded on to the ship, the buyer assumes risk.

Due to potential confusion with domestic North American usage of "FOB", it is recommended that the use of Incoterms be explicitly specified, along with the edition of the standard. For example, "FOB New York (Incoterms 2000)". Incoterms apply primarily to international trade, not domestic trade within a given country.

This use of "FOB" originated in the days of sailing ships. When the ICC first wrote their guidelines for use of the term in 1936, the ship's rail was often still relevant, as goods were often passed over the rail by hand. In the modern era of containerization, the term "ship's rail" is somewhat archaic for trade purposes. The standards have noted this.

Incoterms 1990 stated, "When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use." Incoterms 2000 adopted the wording, "If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used.".