Fiscal Year Meaning
Fiscal Year (FY) is referred to as the period used for accounting purposes by the industry at large. It is a period lasting for twelve months and is used for budgeting, account keeping and all the other reporting for industries.
- A fiscal year of a country is set by its government and there is no universal standard on it. Depending upon a country, FY may get changed. Due to this constant changing of accounting period across countries, an analyst needs to take this into consideration during preparing reports or analyzing the financials of a company.
- Generally, by law, several jurisdictions demand that the companies prepare and publish its financials on an annual basis. But the rule is applicable to the duration of the reporting period, and not on its place value.
- In order to make reporting complete, the reports are accompanied by the FY for which is it being reported. For example, the FY15 report will refer to FY 2015.
Need for Fiscal Year FY
Why is it important to have a defined term for an accounting period for companies? One of the reasons why a definite term required for financial reports is that companies are listed on their countries’ stock markets as well. And in today’s world of connectivity, investors from different countries are investing in companies listed in different stock markets across the globe in different time zones.
In order to facilitate the streamline flow of information across different stock exchanges, one has to be cognizant of accounting periods.
Fiscal Year Vs Calendar Year
Differences Between Fiscal Year Vs Calendar Year are as follows:
- This is a specific accounting term which need not necessarily start on January 1st of the year and fiscal year-end on December 31st. This can start at any point, just that it needs to have a continuous period of twelve months to finish one accounting period. Across different countries, the FY may not necessarily mean the same period.
- The calendar year, however, always fiscal fear starts on the first day of a new year, i.e. January 1st. Across countries, calendar year refers to the same period of consecutive twelve months starting on January 1st and ending on December 31st.
- Some companies, rather, decide to choose their FY that consists of only full weeks. The fiscal year ends there on a particular day of the week. In such cases, the length of the FY is not exactly twelve months. Instead, some fiscal years are fifty-two weeks long while some are fifty-three weeks long.
Advantages of Operating on Fiscal Year FY
- One of the main deciding factors for companies while making the choice of their FY is their business cycle. Some industries see a parallel in their business cycle with the calendar year as it fits them better. In such a case, they opt to choose the calendar year as their reporting period instead of FY
- For other industries, a better choice could be to follow FY as their accounting period as the companies find it counterproductive to follow calendar year for reporting that comes with adjustments for the mismatch in the accounting period and their business cycles.
- Schools and colleges, for instance, prefer to choose FY (starting around June) as their accounting period. The reason for this is that the time period coincides with the intake of new batches of students.
Fiscal Year Example
Retail industries, in general, see a surge in business in December and January holiday season.
If the retailer chooses Calendar Year
Let us assume for argument sake that the 2015 holiday season (December 2015 and January 2016) was exceptional for the retailer and 2016 holiday season (December 2016 and January 2017) was very poor.
When comparing the two seasons, the following will happen
- 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.
If the retailed followed Fiscal year
If the retailer chooses an FY different from the calendar year (say 1st April to 31st March), then
- FY2016 will include the high performing months (Dec’15 and Jan’16)
- FY2017 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 the Fiscal year is very helpful.
#1 Fiscal Year Example – Accounting Professionals
Another advantage for companies operating in the FY is that they are able to get competitive prices on accounting professionals’ fees and reporting charges. As these approaches its term, across the industry, demand for accounting professionals increases in order to meet the tax department’s deadline. This is the business opportunity for accounting companies and they are on the lookout for companies that serve as their customers. This provides companies to negotiate harder as there is enough supply in the market.
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 FY will be 2017 for the period 1st April 2016 to 31st March 2017.
#2 Fiscal Year Examples – Industry Wise
Apparel Stores Fiscal Years
Below is the list of FY for Apparel Companies.
Global Banks Fiscal Year
We note that most of the banks follow the Calendar year-end for financial reporting purposes.
Education Companies Fiscal year
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. Likewise, DeVry education has 30th June as FY end.
In the above article, we looked at why there is a need for having a definite term, “FY” and understood its meaning. For the curious ones, there are multiple sources on the web highlighting the advantages of choosing a particular period as its FY. In general, the decision of choosing an FY for a company is very specific to its business cycle, the reporting deadlines of the country in which it operates and demographics.
Video on What is Fiscal Year?
This has been a guide to what is Fiscal Year and its meaning. Here we discuss the need for a fiscal year along with its advantages. We also take examples of a fiscal year and highlight its differences relative to the calendar year. You may learn more about accounting from the following articles –