Landed Cost Reserve Mechanics for Ocean Freight in Borrowing Base Formulas
Landed cost reserves deduct unpaid ocean freight and customs liabilities from inventory borrowing bases to protect lender collateral net liquidation values.
Cost Insurance Freight
Meaning
International commercial terms define the division of costs and risks between buyers and sellers during maritime transport. Under the rules of cost insurance freight, the seller must arrange and pay for the transport of goods to a named port of destination. This arrangement includes securing minimum marine insurance coverage against the buyer’s risk of loss or damage.
The boundary of the seller’s responsibility for the physical goods terminates when they are loaded on board the vessel.
Risk Transfer
Marine transit hazards shift from the exporter to the importer at the port of loading, even though the exporter pays for the freight. Under the terms of cost insurance freight, the seller’s delivery obligation is complete when the goods are safely loaded on the ship. If the cargo is damaged during the ocean voyage, the buyer must file a claim with the insurance company rather than seeking damages from the seller.
This separation of risk and payment requires clear documentation, including the bill of lading and the insurance policy. Importers must review these documents closely before accepting the shipment to ensure the coverage complies with local customs and transport laws.
Financial Obligation
Purchasing agreements specify which transport charges belong to each party to avoid terminal handling disputes. The price under cost insurance freight includes the export clearance costs but excludes import duties or local port fees at destination. Sellers pay the ocean carrier directly for the voyage.
Buyers assume all costs associated with unloading the cargo at their own discharge terminals.
Shipping Protocol
Commercial contracts designate the specific port of discharge to determine the final freight pricing. Negotiators use cost insurance freight for bulk raw materials or agricultural goods that move by water. It cannot be used for air transport or containerized shipments that cross land borders.
Multi-modal shipments require alternative trade terms to ensure risk transfers at the inland terminal.
Accounting Rules for Net Realizable Value Decreases during Overseas Transit
In-transit inventory write-downs require immediate general ledger reserve recognition under IAS 2 and ASC 330 whenever landed cost exceeds destination net realizable value.