Fiscal Year vs Calendar Year

Differences Between Fiscal Year and Calendar Year

There are two types of years that prevail in the corporate world. These two years are Fiscal year and Calendar year. The similarity between these years is that these last for a period of total 365 days or consecutive twelve months. Calendar year begins on the first of January and ends on 31st December every year while fiscal year can begin on any day of the year but will end on exactly the 365th day of that year. Both these years have a total period of consecutive twelve months.

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What is Fiscal Year?

A fiscal year can be defined as a year in which business organizations/ firms/ companies/ entities prefer preparing their financial reports for the year. This year may not be the same in all the countries. In a fiscal year reporting method, companies may choose to prepare their financial statements on a different twelve-month basis and not the same as the calendar year.

It is 12 months used for calculating and preparing annual (“yearly”) financial statements in businesses and other organizations all over the world.

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 a fiscal year ending June 30.

What is 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, it is a year that 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 in the Gregorian calendar. It begins on January 1 and ends on December 31, consisting of 365 days (366 days once every four years).

In a calendar year reporting method, companies will prepare their financial reports/ statements for the year based on the transactions that have taken place on the 1st of January and will incorporate all other transactions that have taken place until the 365 days of the year that is 31st December.

Colgate reports its financial statements for years ended December 31. This simply means that Colgate uses Calendar Year (1st January – 31st December).

Calendar vs. 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 usually 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 the Calendar year, then will be two implications –

1. High performing month of Dec’15 gets included with the 2015 year ending results
2. However, one high performing month of Jan’16 and one underperforming month of Dec’16 is incorporated 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 the calendar year (say 1st April to 31st March), then

1. FY2016 (1st April 2015 to 31st March 2016) will include the high performing months (Dec’15 and Jan’16)
2. FY2017 (1st April 2016 to 31st March 2017) will consist of 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 a poor season, thereby effectively capturing the seasonality.

This is why the Fiscal year is beneficial.

Fiscal Year vs. Calendar Year Infographics

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Key Differences

• The critical difference between a fiscal year and a calendar year is the fact that the former can start on any day and end precisely on the 365th day, whereas the latter begins on the first of January and ends on the 31st of December every year.
• A calendar year begins on a particular year and ends on the last day of that year. In the case of the fiscal year, two different consecutive years are most likely to fall into one reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more, and this is never going to happen in the case of a calendar year.
• For example, a company wishes to have a fiscal year starting the 1st of April, 2015, and the same might end on the 365th day from the beginning date that is 31st of March, 2016. In this way, the company has a fiscal year that successfully covered two consecutive years. In the case of a leap year, a calendar year will necessarily have a leap year that is a period of 365 days, whereas a fiscal year may or may not have a leap year. This entirely depends on the dates chosen for the beginning and end of the fiscal year.
• The level of difficulty and challenges faced in auditing and accounting mechanism can be minimal in the case of companies that follow the calendar year as compared to the companies that follow the fiscal year.
• This difficulty and level of complications faced in accounting and auditing can be met by companies that do not follow a consistent pattern of the fiscal year, or in other words, the companies whose fiscal year changes year after year. This makes it difficult for them to record financial transactions and get the same audited with payments and tax records.

Comparative Table

Basis of comparison		Fiscal year		Calendar year
Definition		It is 365 days that can commence on any day of the year and will end exactly on the 365th day or the last day of the consecutive 12 months.		It is twelve months that commences on the first day of January and ends precisely on the last day of December.
Number of days		A fiscal year is a period of total 365 days;		A calendar year is also 365 days.
Number of months		It has 12 consecutive months.		It also has a period of twelve consecutive months.
Start date		It can start on any date as long as it is ending precisely on the 365th day.		It starts on the 1st of January.
Ending date		The fiscal year may end on the 365 days or exactly after the completion of 365 days from the start date.		The calendar year ends on 31st December.
Level of difficulty and challenges faced in auditing		It can be said that the level of difficulty and challenges of auditing and accounting will be high if a company follows a fiscal year method and prefers being non-consistent with the duration for every year.		The level of difficulties and challenges faced in accounting and auditing by companies that follow the calendar year is very minimal as compared to the companies that follow the fiscal year method.
Leap year		It may or may not have a leap year.		It will always have a leap year once every four years.
Simplicity		It is not that simple.		It is a straightforward and convenient option.

Examples

#1 – Apparel Stores

The below table shows the top 15 companies by Market Capitalization ($ million) in the 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.

source: ycharts

#2 – Global Banks

The below table shows the top 10 Global banks by Market Capitalization ($ million). We note that all of them follow the Calendar year-end for financial reporting purposes.

source: ycharts

#3 – Education Sector

The below table shows the top 10 education companies in the US by market cap ($ million). We note that there is no clear trend in using the financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more year-end. Some follow the calendar year, while New Oriental Education has 31st May as year-end. Likewise, DeVry education has 30th June as fiscal year-end.

source: ycharts

Fiscal Year vs. Calendar Year Video

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