What is Fiscal Year-End?
Fiscal year-end, also called as financial year-end, means a continuous period of 12 months/52-53rd week comprising equivalent to one year period used for budgeting, planning, accounting and reporting purposes of key information and financial reports by the business and other organizations based on the business and operations cycle of the reporting entity or as per period notified by the governments.
When does a Fiscal Year End?
Every year, governments have to issue budgets, companies have to publish annual reports. Fiscal year-end refers to the end of one year for which reporting is being done and performance is analyzed. A company may have the fiscal year the same as the calendar year viz, 1 Jan to 31 Dec, in which case fiscal year-end would be 31 Dec of the year.
Setting fiscal year-end could be linked to the business cycle of entity, the academic year in the society, general climatic conditions in the area, expenditure pattern of the government, festive season periods, etc. The fiscal year is denoted by the calendar year in which the year ends. Example 01 Oct 2019 to 30 Nov 2020 would be the fiscal year 2020. A fiscal year can be referred to as one year covering one business and accounting cycle which records and reports the business activities and financial statements.
Fiscal Year-End Examples
- Every country has its own fiscal year-end defined. In the US, the fiscal year is from 01 Oct to 30 Sept every year. Some states in the US have the fiscal year of 01 July to 30 June. However, companies can adopt a different fiscal year based on their business cycle.
- For example, Walmart has a fiscal year from 01 February to 31 January as the holiday and festive season in the US is in December and January months which would get covered in one fiscal year. Having a fiscal cycle of 1 Jan to 31 Dec would split Walmart’s one peak shopping season into two different fiscal years thereby information relating to one shopping season would not be available with the company to compare and analyze the demand and sales performance of a season.
- Adobe Systems in the US have the fiscal year-end of November while Apple has fiscal year-end of last Saturday of September to best represent their sales and revenue contract cycles. Companies also adopt the fiscal year-end date as the nearest business working day of the last month of the fiscal year.
- In the UK, the fiscal year is from 01 April to 31 March historically. India’s fiscal year is from 01 April to 31 March which coincides with agriculture Rabi crop harvest season.
Advantages of Fiscal Year-End
- Benefits of having a fiscal year-end different from the calendar year or standard fiscal year period are that the business performance over a year can be aligned with the actual business cycle in terms of revenue and profit cycle.
- For example if expenses are incurred during February to April and off-season is from July to Sept and peak season is from Dec to Jan like in Garment industry, then it is better to have a fiscal year of February to January so that revenues and expenses can be reported in the same year for better analysis of the performance of the business by all stakeholders.
- Another advantage is peak season for employees can be avoided for devoting time for book-keeping and reporting as these-work can be shifted during the off-season by adjusting the fiscal year-end.
- Administration costs can also be reduced if regulatory and reporting work is done during the offseason and avoiding the peak season of accountants and external agencies.
- Planning for next year and performance review can be done better if fiscal year-end is aligned with the business cycle.
Disadvantages of Fiscal Year-End
The disadvantage of having a different fiscal year-end compared to the calendar year/tax year/standard fiscal year is that
- Accounting restatements and reconciliation need to be made for providing information for taxation based on tax laws and other regulatory requirements.
- Duplication of work for maintaining books separately for external agencies and internal records if the reporting period is not as per fiscal year-end adopted by companies.
- Difficult to compare with industry data in case of different fiscal year-end adopted compared to other companies in similar industries.
- Additional cost for maintaining dual books or reconciliations between different reporting periods.
- Corporates can change their fiscal year by making an application to SEC in the US and to other regulators in other countries based on their legal acts.
- Change in a fiscal year can be done based on circumstantial events like merger and acquisition, winding up, acquisition of control, consolidation of an entity with the entity having a different fiscal year.
- Fiscal year-end change can be also done to align the period with the business cycle. Most importantly, the fiscal year should be aligned with the business cycle for better reporting and comparison of performance.
- Retail companies in the US have the bulk of the sales done during Dec and Jan which are a holiday and festive seasons. Hence the fiscal year should cover Dec and Jan so that the results of the entire business cycle can get covered in one year and thereby business performance can be analyzed better.
- Salt production companies in southern India have a business cycle of Oct to Sept based on rain and other climatic conditions. Hence their performance can be better analyzed over a business cycle of Oct to Sept rather than April to March.
- Taxation laws have a year that might be different from fiscal year hence it is also prudent to review if tax period and fiscal period can be kept the same to avoid duplication of book-keeping work for taxation and financial reporting purposes.
For streamline flow of information to stakeholders, it is necessary to have a fiscal year that is periodic and consistent with the economic and business scenario of governments and corporates. Having a constant fiscal year covering one entire business cycle gives better information to stakeholders for informed decision making. Future projections can also be made more accurately comparing to past fiscal period information at hand thus improving projections and budgetary allocations. Thus, a defined fiscal year-end is critical for reporting and monitoring of business activities.
This has a guide to What is Fiscal Year-End & its Meaning. Here we discuss the components of fiscal year-end along with examples, advantages, and disadvantages. You can learn more about from the following articles –