Fiscal vs Calendar Year: These Factors Matter

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Businesses perform a variety of routine but essential tasks, including reporting. Here, two periods matter: calendar year or fiscal year.

A typical calendar year seems fairly straightforward: January 1 through December 31. However, when we look at all the legal and business reasons companies choose certain dates, things get a bit more complicated.

The actual “calendar year” can be any twelve-month period determined by a company (or its investors). Another term for this is fiscal year.

Sometimes accounting services tell their clients to maintain calendar years that mesh with the government’s fiscal year (ending on September 30) to avoid confusion when filing taxes or reading SEC filings.

In the end, the best accounting consultants can provide the ideal calendar year for the business based on the following factors:

1. Tax Implications

One of the critical factors to consider when choosing the business period per year is tax implications. A company might want their fiscal year to end (FYE) on a date that will ensure they can write off as many expenses as possible at the end of the year.

For example, if a business has been deducting meal and entertainment expenses for years now, it would be beneficial from a tax perspective to have those deductions specifically occur at the end of their fiscal year as opposed to throughout the year as they incur them.

Matching the fiscal year with the tax filing period will also help the business ensure they can report the correct information on their forms. This will mean fewer to zero issues with the IRS later. One of the last things companies should avoid is paying hefty penalties or back taxes because of poor tax reporting.

2. One-time Events

To provide investors with an accurate representation of how well a company is performing, most businesses choose to have the same FYE each year. However, there are times when a company will have different fiscal years for internal decision-making/planning and external reporting.

For example, if a business is launching a new product or service, it can postpone its reporting of that revenue until the following fiscal year to help ensure they accurately display how well their core products are doing at this time.

One event that affects investor reporting and, thus, the fiscal year is the COVID-19 pandemic. The economic disruption it introduced that lead to business closures and temporary shutdowns might force companies to consider another period for data references.

3. Existing Contracts

Sometimes businesses are locked into contracts that force them to continue with an existing fiscal year even after changing it. This can be problematic for some companies that might actually want their accounting year to end on December 31 (the last day of the calendar year) but must maintain their current date due to contractual obligations.

4. Financial Reporting Periods

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The fiscal year of a business can also match the financial reporting periods set by the government. These reports often follow strict guidelines about what can be included or excluded when determining earnings and revenue numbers for the most recent quarter.

This is why it is important to understand which reporting period a company’s income statement includes to accurately represent how well they are doing at that time. Here are some of the most common financial reporting periods:

  • Quarterly Reporting: The standard four quarters per year ends on December 31, March 31, June 30, or September 30. Most companies use this method of accounting for their earnings reports.
  • Semi-Annual Reporting: Some businesses report annually instead of quarterly because it allows them to focus on fewer reports throughout the year while still providing investors with financial information every six months.
  • Annual Reporting: This is when a company chooses to report its earnings once per calendar year for all the business days within that twelve-month span. Any company choosing this method of reporting should be prepared to provide more detailed information than companies reporting quarterly or semi-annually. However, many like this option due to its simplicity.

What Happens if a Company Changes Their FYE?

If a publicly traded corporation or any business decides they want to change their fiscal year-end date, they need to consider the following:

1. Existing Contracts Will Have to Be Honored

If a business has already entered into an agreement with another entity that forces them or requires them to maintain their current fiscal year, they are legally obligated to continue following this traditional accounting method for their earnings reports.

2. Business Operations Must Align with the Change in FYE

If a business decides to change its FYE date, there is some reasoning behind doing so. Whether that reason stems from tax reasons or improvement of strategic planning capabilities, changing its fiscal year means that operations must be modified to reflect this change.

Otherwise, any quarterly results reported throughout the new FYE might not properly represent how well (or how poorly) the company is performing within that time frame.

As you can see, reporting isn’t as simple as businesses think it will be. To ensure they provide only the right information to all stakeholders, from the investors to the IRS, companies can benefit from accounting support.

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