Calendar Year vs Fiscal Year – Colgate reports its financial statements for years ended December 31. This simply means that Colgate uses Calendar Year (1st January – 31st December). However, let us look at Procter & Gamble (P&G) Financial Reporting.
We note that P&G uses a different year ending for reporting its Financial Statements than that of Colgate. P&G uses fiscal year ending June 30.
What does this mean? Can we compare Colgate’s 2016 (calendar year) performance with P&G’s 2016 (fiscal year)? What is the rationale for choosing a different financial reporting year than the calendar year. In this article, we look at Fiscal Year vs Calendar Year in detail –
- Calendar Year vs Fiscal Year
- Why is the concept of Fiscal Year needed?
- Importance of Fiscal Year
- Most commonly used Fiscal Years
- Fiscal Year vs Calendar Year Examples
- How to choose a Fiscal Year for a business
- Fiscal years followed by the Governments
- Fiscal years followed across important countries
- Consolidation of Financial Statements & Fiscal Years
- Tax Year (Assessment Year) and Fiscal Year
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Fiscal Year vs Calendar Year
A year is simply defined as the time taken by the earth to make one revolution around the sun.
Now, what is a Calendar Year? Generally, speaking a calendar year begins on the New Year’s Day of a given calendar system and ends on the day before the following New Year’s Day, and thus consists of a whole number of days. There are different calendar years like the Islamic Calendar, the Gregorian Calendar, etc. One which is most widely used is the Gregorian calendar. It begins on January 1 and ends on December 31 consisting of 365 days (366 days once in every 4 years).
Similar to a calendar year, there is something known as a Fiscal Year . It is a period of 12 months used for calculating and preparing annual (“yearly”) financial statements in businesses and other organizations all over the world.
Why is the concept of Fiscal Year needed?
Before understanding the need for a fiscal year, let us briefly understand the meaning of Financial Statements. Financial Statements present all relevant financial information about a business in a structured format. Balance sheet, Profit & Loss Account and Cash Flow Statement form the key financial statements for any organization.
- Balance Sheet: It is a statement of capital invested in a business, assets which belong to a company and liabilities payable by the company at a particular point of time.
- Profit & Loss Account: It is a statement which presents the income earned and expenses incurred by the organization and the resulting profit or loss over a given period of time.
- Cash Flow Statement: A cash flow statement reports cash generated and utilized through various activities (Operating cash flows, Financing cash flows & Investing cash flows) used during a given period of time.
As you must have noticed, all of the above statements have something to do with TIME. This is why a fiscal year is very important. Fiscal year is a period of any 12 consecutive months chosen by an organization to be its official accounting period. All the financial statements are prepared for these twelve months.
Why Fiscal Year – Retailer Case Study
Let us take an example of a Retailing Business. Seasonality in retailing business is generally seen in December and January holiday months, where sales are generally higher than the other months.
Let us also assume that a retailer Coy R had bumper sales the months of Dec’15 and Jan’16, however, it underperformed in the months of Dec’16 and Jan’17.
Case 1 – If Coy R follows Calendar Year
If the management prepares its financial statements using Calendar year, then will be two implications –
- High performing month of Dec’15 gets included with the 2015 year ending results
- However, one high performing month of Jan’16 and one underperforming month of Dec’16 is included in 2016 results.
When we compare 2015 results with that of 2016, we note that the comparison is not fruitful at all as the full effect of seasonality is not captured.
Case 2 – If the retailer follows Fiscal year
If the retailer choose a fiscal year different from calendar year (say 1st April to 31st March), then
- FY2016 (1st April 2015 to 31st March, 2016) will include the high performing months (Dec’15 and Jan’16)
- FY2017 (1st April 2016 to 31st March, 2017) will include the underperforming months (Dec’16 and Jan’17)
This time when we compare FY2016 with that of FY2017, we can effectively contrast an excellent season with that of poor season thereby effectively capturing the seasonality.
This is why Fiscal year is very helpful.
Another example. An educational institution may follow a fiscal year which starts in July and ends in the coming June to be in sync with their academic calendar. Likewise, those organizations involved in farming activities will have their fiscal year that sync crop life cycle and harvesting period.
Importance of Fiscal Year
Fiscal Year defines the period over which Financial Statements need to be prepared. This helps in monitoring key financial statistics and enables the organization to understand where they stand at the end of each year.
Ratio analysis is possible only when a period is defined. Comparative analysis of financial statements of previous periods is also possible if we have a defined Fiscal Year. Imagine comparing the financial statements of an organization for the following two periods:
- 1st May 2013 to 5th July 2014
- 17th Jan 2015 to 10th October 2015
Will there be a possibility to show a percentage change in revenue for the above two periods?
How will the organization figure out the increase or decrease in the raw material cost?
All of the above analysis will be possible if we have a defined period for reporting financial statements. It enables to prepare short term and long term budgets. It also enables budget variance analysis for a given period of time.
Most commonly used Fiscal Years
Some of the most commonly used Fiscal Years by businesses all over the world are:
- 1st January to 31st December
- 1st April to 31st March
- 1st July to 30th June
- 1st October to 30th September
A fiscal year is usually denoted by the year in which it ends. So if a business follows the April to March financial cycle, then the fiscal year will be 2017 for the period 1st April 2016 to 31st March 2017.
Fiscal vs Calendar Year Examples
Apparel Stores Fiscal Year
Below table shows top 15 companies by Market Capitalization ($ million) in Apparel Stores sector. As we see from the example of Retailer with December and January being best performing months, we note that most Apparel stores do follow the January end fiscal year policy.
Global Banks Fiscal Year
Below table shows top 10 Global banks by Market Capitalization ($ million). We note that all of them follow the Calendar year-end for financial reporting purposes.
Education Sector – Fiscal Years
Below table shows top 10 education companies in US by Market cap ($ million). We note that there is no clear trend in using the financial statement year-end. Some follow the calendar year, while, New oriental Education has 31st May as year end. Liikewise, DeVry education has 30th June as fiscal year end.
How to choose a Fiscal Year for a business
There is no fixed rule for choosing a Fiscal Year for a given business. However, the following pointers can be taken into account before deciding which fiscal year to choose for your business
- First and foremost do check if the country in which the company is registered has any specific rules and regulations regarding following a particular fiscal year. If there are rules to be followed then you do not have much of a choice but to follow the fiscal year required by law.
- Apart from the above regulations, countries can a have a set of laws relating to taxation. Organizations are expected to pay tax to the government and this tax needs to be calculated as per the governing law. The tax laws generally state something known as a “tax year” which is a period of time and profits earned in that period need to be taxed. It would be better to follow a fiscal year which same as the tax year. (We will come back to this point with further details in a different section).
- Next, if the above is not applicable then get a thorough understanding of the business cycle and you can finalize the fiscal cycle on the basis of this. Generally, people tend to keep the Fiscal Year which starts in the month when the production for a product starts at they achieve high revenue towards the end of the fiscal year.
- You can also keep a close watch on the industry competitors. It is better to use the same fiscal year which is being used by peers in the industry as it helps to compare and keep a check whether the annual revenue is in line with competition. It is also easy for the shareholders to compare and invest wisely.
Note: Do not confuse start of the fiscal year with the date of start of your business. These are two separate things. You can start the business at any given point of time and choose the fiscal year which will not be dependent on this date.
For example, the business was incorporated on the 2nd of Feb 2016. You can still choose the fiscal year as 1st January to 31st December. The first fiscal year for this company will start on the day of incorporation i.e. 2nd Feb and end on 31st Dec.
Fiscal years followed by the Governments
Similar to business organizations, even governments needs to announce its financial position to the nation as a whole. This is why they need to follow a fiscal year as well.
As we all know, the government has its major income is from tax collection. It order to collect tax, it creates regulations and tax laws so that all tax payers will pay tax in a given Fiscal Year. At the same time, the government has its major spending on public facilities such as national security, infrastructure, transportation, education, healthcare, etc. It prepares an expenditure budget in the line with expected income through taxes.
All the above-budgeted spending and collections need to be for that given Fiscal Year. This budget is approved by the Government before the start of their Fiscal Year.
- Example 1 The US Federal Government begins its Fiscal Year on 1st October and ends it on 30th September every year.
- Example 2 The Indian Government begins its Fiscal Year on 1st April and ends it on 31st March every year.
Fiscal years followed across important countries
The following are the fiscal years followed by majority of the businesses in the given countries
- The United States of America – Gregorian Calendar (1st January to 31st December)
- United Kingdom – Starts on 1st of April and ends on 31st of March
- China – Gregorian Calendar (1st January to 31st December)
- India – Starts on 1st of April and ends on 31st of March
- Australia – Starts on 1st July and ends on 30th June
- Japan – Gregorian Calendar (1st January to 31st December)
- Germany – Gregorian Calendar (1st January to 31st December)
- Singapore – Gregorian Calendar (1st January to 31st December)
- United Arab Emirates – Gregorian Calendar (1st January to 31st December)
- France – Gregorian Calendar (1st January to 31st December)
- New Zealand – Starts on 1st of April and ends on 31st of March
- Russia – Gregorian Calendar (1st January to 31st December)
- South Africa – Starts on 1st of April and ends on 31st of March
Note: As it seems to be clear, many of the leading economies of world are following the Gregorian calendar as their Fiscal Year.
Consolidation of Financial Statements & Fiscal Years
A holding company (a parent company) needs to present consolidated financial statements to its investors where it needs to consolidate Financial Statements of all the subsidiaries along with its own financial statement.
Obviously, when financial statements are to be consolidated, they need to be prepared for the same Fiscal Year as it clearly will not make any sense to consolidate financial statements prepared for different fiscal years.
Holding Company follows a fiscal year from 1st April to 31st March whereas Subsidiary A Company follows a fiscal year from 1st January to 31st December and Subsidiary B Company follows a fiscal year from 1st July to 30th June.
In the above case, how will an accountant even make an effort to consolidate the above statements?
The first thing he will have to do is prepare a separate set of financial statements for Subsidiary A Company and Subsidiary B Company for the fiscal year 1st April to 31st March.
Then only he will be able to consolidate the three financial statements which will make sense to the investors. It will also be important to make a note of the same in the accounting policies that the Financials of the subsidiaries have been prepared for the Fiscal Year so that they can be consolidated.
Imagine if he doesn’t prepare the financial statements for the same financial year?
The revenue and expenses reported to the shareholders in the form of the consolidated financial statements will pertain to different period of time and they will not be able to rely on the consistency of the statements.
Tax Year (Assessment Year) and Fiscal Year
As mentioned earlier, a country has its own tax year which basically means that profits earned during this period need to be taxed and paid within the time stipulated by the government. If there is a difference between the Fiscal year followed by the organization and the tax year then adjustments have to be done to the profit earned in the Fiscal year to arrive at the taxable profit.
In many countries, the tax payers are themselves allowed to choose a tax year. Most of the countries require that the tax year should be a period of 12 months / 52 weeks. In this case, organizations choose to select tax year which coincides with their accounting year so that it makes life easier for the accountants.
In either of the two above mentioned case, the most important benefit of having fiscal year same as the tax year is that there will be no confusion in calculating tax and hence there is no scope of paying tax twice on the same profits.
Note: There can be cases where the government can have different tax years for different types of tax payers.
The best example we can take is that of United Kingdom:
- It requires its individual tax payers to pay tax for a tax year starting on 25th March to 5th This is on account of the fact that Britain historically follows a separate calendar named as the Julian calendar.
- For the purpose of corporate tax payers, the financial year runs from 1st April to 31st March.
- At the same time, it gives freedom to its organization to follow any accounting year for presentation of its financial statements.
- In case a company follows a financial year other than the tax year, and the government announces a change in tax rate, the taxable profit will have to be apportioned to financial years on a time basis.