Fiscal Year Meaning
Fiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. 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 and 1st October to 30th September
It 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.
Fiscal Year Vs. Calendar Year
Differences Between Fiscal Year Vs Calendar Year are as follows:
- Former is a specific accounting term which need not necessarily start on January 1st of the year and fiscal year-end on December 31st. Fiscal year 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. They end 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.
- One of the main deciding factors for companies while choosing their FY is their business cycle. Some industries see a parallel in their business cycleBusiness CycleThe business cycle represents the expansion and contraction of the economy that occurs due to ups and downs in the gross domestic product (GDP) of a country. It is experienced over the long term and goes parallel with the natural growth rate. 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 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.
- The 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 a poor season, thereby effectively capturing the seasonality.
Fiscal Year Examples – Industry Wise
Below is the list of FY for Apparel Companies.
We note that most of the banks follow the Calendar year-end for financial reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. purposes.
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. 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.
Video on Fiscal Year
This article 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 and also its differences relative to the calendar year. You may learn more about accounting from the following articles –