How Incoterms Impact Your Inventory and Accounting in Xero and Unleashed

By Jay Mann

Incoterms, short for International Commercial Terms, are essentially a set of predefined terms widely used in international and domestic trade to clearly outline ownerships, responsibilities and risks associated with the transport and delivery of goods. These can have significant negative impacts on the integrity of data in your Xero and Unleashed systems if these are neglected. 

The most updated set of rules is laid out in Incoterms® 2020. This includes 11 terms divided into 2 categories:

Rules for Any Mode of Transport:

• EXW (Ex Works): The seller makes the goods available at their premises. The buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination.
• FCA (Free Carrier): The seller delivers the goods to a carrier or another person nominated by the buyer at the seller's premises or another named place.
• CPT (Carriage Paid To): The seller pays for the carriage of the goods to the named place of destination. The risk transfers to the buyer upon handing over the goods to the first carrier.
• CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also pays for insurance against the buyer's risk of loss or damage to the goods during transit.
• DAP (Delivered at Place): The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination.
• DPU (Delivered at Place Unloaded): The seller delivers when the goods are unloaded from the arriving means of transport and placed at the disposal of the buyer at the named place of destination.
• DDP (Delivered Duty Paid): The seller bears all costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods for export and import, pay any duty for both export and import, and carry out all customs formalities.

Rules for Sea and Inland Waterway Transport:

• FAS (Free Alongside Ship): The seller delivers when the goods are placed alongside the vessel at the named port of shipment. The buyer bears all costs and risks from that moment onwards.
• FOB (Free On Board): The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. The risk transfers to the buyer once the goods are on board.
• CFR (Cost and Freight): The seller pays the costs and freight to bring the goods to the port of destination. The risk transfers to the buyer once the goods are on board the vessel.
• CIF (Cost, Insurance, and Freight): Similar to CFR, but the seller also pays for insurance against the buyer's risk of loss or damage to the goods during transit.

All of the Incoterms may have different procedures to correctly operate within Xero and Unleashed.

How does this Impact Xero and Unleashed

Revenue/Asset Recognition

It is essential that the incoterms used are reflected within your Xero accounts. When the risk and ownership of goods transfer from the seller to buyer, the seller should now recognise revenue and the buyer the asset (in accordance with accounting standards such as IFRS 15, ASC 606, IAS 16 or ASC 360 etc). 

As a result, the buyer should only receipt goods in Unleashed once the ownership has transferred, though consideration should be placed on whether an ‘In-transit’ warehouse should be used until goods actually arrive. Within Xero this may be classified as stock, though an ‘In-Transit’ nominal may be used especially when trying to observe management accounts.

In addition, the sale is only complete in regards to the seller, once the ownership is transferred, and no sale should be finalised in either system until then.

Risk Management

Incoterms specify the exact point at which the risk of loss or damage to the goods transfers from the seller to the buyer. This has Xero and Unleashed implications related to potential inventory write-offs and insurance claims:

• Understanding the risk transfer point helps determine who is responsible for the goods if they are damaged or lost in transit. As a result, it may be ideal to use an ‘In-Transit’ warehouse in Unleashed to track the location of orders if they are to get lost in transit when the risk has been transferred. 
• If the risk has transferred to the buyer, they would typically bear the loss and potentially file an insurance claim if they have coverage. The seller would likely have already recognised revenue and removed the goods from their inventory.
• Conversely, if the risk still resides with the seller, they would need to account for the loss of inventory (in both systems) and potentially file their own insurance claim. Revenue recognition might be impacted if the goods were not successfully delivered.
  

Cost Allocation

Each Incoterm clearly details the responsibilities of the buyer and seller regarding expenses such as transportation, insurance, and customs clearance costs. If the Incoterm means that you bear risk, these relevant expenses should be dealt with in Unleashed.

• Transportation Costs: The party responsible for paying for transportation must record this as an expense. For example, under CPT, the seller bears the cost of carriage to the named destination, while under EXW, the buyer is responsible for all transportation costs from the seller's premises.
• Insurance Costs: The Incoterm specifies who is obligated to obtain and pay for insurance coverage. For instance, under CIF, the seller must provide minimum insurance coverage for the buyer's benefit during transit.
• Customs Duties and Taxes: Certain Incoterms, like DDP, require the seller to pay all import duties and taxes. Conversely, under EXW, the buyer is responsible for all import and export formalities and costs.

Accurately allocating these costs according to the agreed Incoterm is crucial for determining the true cost of goods sold and the profitability of transactions. These costs may also need to be factored into inventory valuation, as a result, they should be added as charge lines in Unleashed to increase the value of stock, and eventually flow into Xero as a bill.

Inventory Ownership and Valuation

Incoterms clearly define when the legal title and the risks associated with the goods transfer from the seller to the buyer. This is crucial for inventory management because it determines when the goods should be recorded in the buyer's inventory and removed from the seller's inventory.

The costs associated with bringing inventory to its present location and condition are included in its valuation (as per IAS 16). Incoterms directly influence which costs are incurred by the buyer and seller and, therefore, which costs might be included in the buyer's inventory valuation within Unleashed as charge lines to calculate landed costs.

• Suppliers may bear the significant risk and cost for transportation and insurance (e.g., CPT, CIF, DDP).
• Under Incoterms where the buyer assumes more responsibility for these costs (e.g., EXW, FOB), they will incur additional expenses for transportation, insurance, and potentially customs duties. These costs should be included in valuations of stock.

Failure to properly account for Incoterm-related costs in inventory valuation can lead to an inaccurate representation of inventory value on the balance sheet and miscalculation of cost of goods sold on the profit and loss account in Xero.

In Unleashed, accurate landed cost allocation is essential for calculating the true cost of inventory and maintaining reliable margins. Incoterms directly influence landed cost treatment by identifying which party is responsible for charges such as freight, insurance, and customs duties. When the buyer assumes these responsibilities, they can be added to inventory valuation as charge lines in Unleashed. This ensures that the landed cost accurately reflects all expenses incurred in bringing stock to its usable condition and location. Failing to integrate Incoterm-based costs can distort margin reporting and misstate the value of goods in both Unleashed and the financial accounts synced with Xero, leading to skewed business decisions and compliance issues.

Ready to Take Control of Your Supply Chain Data?

Don’t let Incoterms be an afterthought, they directly impact your bottom line, your reporting accuracy, and your compliance. At Outserve, we help businesses like yours integrate best practices into Xero and Unleashed, ensuring your systems reflect the true cost, risk and ownership of your goods.

Need help implementing Incoterm strategies or landed cost allocation in Unleashed?

Contact our team today for a personalised consultation and turn complex logistics into streamlined, accurate operations.