Business, Legal & Accounting Glossary
Fiscal year is the business year used for accounting purposes. Most companies use the calendar year, but any date can be chosen as the first day of this 12-month period.
A fiscal year (or a financial year or accounting reference date, or sometimes budget year) is a 12 or 13-month period used for calculating annual (“yearly”) financial statements in businesses and other organizations. In many jurisdictions, regulatory laws regarding accounting require such reports once per twelve months but do not require that the twelve months constitute a calendar year (i.e. January to December). The financial results presented to shareholders are therefore a “photocopy” (or “snapshot”) of the company’s accounts at the accounting reference date. Fiscal years vary between businesses and countries.
Each fiscal year is divided into four quarters of three months each. Since the fiscal year can start on any day, a company could be reporting fiscal year (FY) 2009 numbers before 2008 has passed on the calendar. A fiscal year is denoted by the year in which it ends. The 12-month period running Jan. 1, 2007 – Dec. 31, 2007 is FY 2007. The period running July 1, 2004 – June 30, 2005, is FY 2005.
The SEC requires companies to include data from their previous fiscal year in reports to the commission, so the public can see, for instance, if sales skyrocketed, if margins contracted, if revenue stayed flat. Comparisons are made in two ways: year-over-year/year-ago (comparing the third quarter of this year to the third quarter of the previous year) or sequentially (comparing this year’s third quarter to this year’s second quarter).
The standardization of a company’s fiscal year increases the validity of comparisons. If Q3 includes the holiday selling season one year, you want to be able to compare that to the corresponding three-month period from the previous year, not to a quarter without that supercharging.
Often the fiscal or tax year is specifically established not to match the calendar year (also called natural year) so that accounting year-end work does not coincide with periods of high activity, such as the Christmas shopping rush for retailers, or with holiday periods when employees may prefer to take a vacation.
A popular use of a non-calendar year as the fiscal year involves retailers. In many countries, at the end of December, levels of inventory, receivables, and payables will be higher than at other month ends and consequently more complex and time-consuming to measure accurately. Therefore, retailers commonly use a month other than December to end their fiscal year. January may be chosen as the last month of the fiscal year because activity levels are likely to be closer to normal by the end of January.
In addition, many companies find that it is convenient for purposes of comparison and for accurate stock taking to always end their fiscal year on the same day of the week, where local legislation permits. Thus some fiscal years will have 52 weeks and others 53. Major corporations that adopt this approach include Cisco Systems and Tesco.
In the United Kingdom, a number of major corporations that were once government-owned, such as BT Group and the National Grid, continue to use the government’s fiscal year, which ends on the last day of March, as they have found no reason to change since privatisation.
Nevertheless, for about 65% of publicly traded companies in the United States and for the vast majority of large corporations in the UK and elsewhere, except in Australia and Japan, the fiscal year and calendar year are identical.
Many universities have a fiscal year that ends during the summer, both to align the fiscal year with the school year, and because the school is normally less busy during the summer months. Examples include Harvard University and most English universities.
Such fiscal years are typically numbered using a calendar year and quarter thereof. A fiscal quarter is 3 months (1/4 of a year). For example, the United States government fiscal year for 2018 (“FY18”, sometimes written “FY17–18”) is as follows:
So the U.S. government’s fiscal year begins on October 1 of the previous calendar year and ends on September 30 of the year with which it is numbered. Prior to 1976, the fiscal year began on July 1 and ended on June 30. The Congressional Budget and Impoundment Control Act of 1974 stipulated the change to allow Congress more time to arrive at a budget each year and provided for what is known as the “transitional quarter” from July 1, 1976, to September 30, 1976. As stated above, the tax year for a business is governed by the fiscal year it chooses.
The Australian government’s fiscal year begins on July 1 and concludes on June 30 of the following year. This applies to personal income tax and the federal budget, and most companies use it as their own. In Canada, the United Kingdom, New Zealand, India, and Hong Kong, the government’s financial year runs from April 1 to March 31, and the United Kingdom corporation tax is charged by reference to that period.
In the UK, the tax year (which governs liability to income tax and capital gains tax) runs from April 6 to April 5. This reflects the old ecclesiastical calendar, with New Year falling on March 25 (Lady Day), the difference being accounted for by the eleven days “missed out” when Great Britain converted from the Julian Calendar to the Gregorian Calendar in 1752 (the British tax authorities and landlords were unwilling to lose 11 days of tax and rent revenue, so under provision 6 (Times of Payment of Rents, Annuities, &c.) of the Calendar (New Style) Act 1750, the 1752–3 tax year was extended by 11 days). From 1753 until 1799, the tax year in Great Britain began on 5 April, which was the “old style” new year of 25 March. A 12th skipped Julian leap day in 1800 changed its start to 6 April. It was not changed when a 13th Julian leap day was skipped in 1900, so the tax year in the United Kingdom is still 6 April. Ireland also used this year until 2001 when it was changed to match the calendar year (the 2001 tax year was nine months, from April to December).
Companies that are units within a “group” of businesses must all use nearly the same fiscal year (differences of up to three months are permitted in most jurisdictions, such as the U.S. and Japan), with consolidating entries to adjust for transactions between units with different fiscal years, so the same resources will not be counted more than once or not at all.
A 12-month period over which a company budgets its spending. A fiscal year does not always begin in January and end in December; it may run over any period of 12 months. The fiscal year is referred to by the date in which it ends. For example, if a company’s fiscal year ends October 31, 2006, then everything between November 1, 2005 and October 31, 2006 would be referred to as FY 2006. Not using the actual calendar year gives many companies an advantage, allowing them to close their books at a time which is most convenient for them.
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This glossary post was last updated: 21st November, 2021 | 0 Views.