● A fiscal year is a 12-month accounting period.
● A fiscal year doesn't necessarily follow the calendar year.
● Factors including seasonality may affect a business's choice of fiscal year.
A fiscal year (FY), also called a financial year, is a 12-month accounting period that a business uses for financial and tax reporting purposes.
Understanding fiscal year
Those who follow business's financial reports often hear things like "the report for Q2, FY 2021" or "the annual report for FY 2022".
However, does "the report for Q2, FY 2021" necessarily include a company's operating data from April 1 to June 30, 2021, and "the annual report for FY 2022" include its operating data from January 1 to December 31, 2022?
To answer the question, we first need to know the similarities and differences between a civil year, a fiscal year, and a tax year.
A civil year, or a calendar year, is based on the Gregorian calendar. It begins on January 1 and ends on December 31. A civil year is divided into four quarters (Q1, Q2, Q3, and Q4), each consisting of three consecutive months.
A fiscal year, or a financial year, refers to a 12-month period used to better record a company's operations.
A fiscal year can follow the calendar year, or it can be a period of any twelve consecutive months upon regulatory approval.
Fiscal years are referenced by their end year. For example, Microsoft's fiscal year begins on July 1 and ends on June 30. Its report for Q1, FY 2021, records its operations from July 1, to September 30, 2020.
A tax year is similar to a fiscal year. With the approval of the regulator, a business can choose to use a fiscal year or a calendar year as their tax year.
Factors affecting the setting of fiscal year
A number of companies set their fiscal year the same as the calendar year for convenience. However, under the following circumstances, some companies would adjust the beginning date of their fiscal year to better reflect their operations.
1. Companies' business is subject to seasonality. For instance, April is the busy season for some companies to collect their accounts receivable. Accordingly, they end their fiscal year in May to include their profits in the latest financial report, making the data look better. Some retailers are at their busiest during the Christmas season, so they avoid ending their fiscal year at the end of the year. Otherwise, they will be short handed and under pressure to do statistical work.
2. Companies want to reduce financial cost. Some small and medium-sized companies fiscal year follows the calendar year, and they hire external accounting firms to help them file taxes. Therefore, many accountants are busy at the end of the year and charge more. Companies wanting to control their costs thus set their fiscal year differently to reduce spending.
3. Regulators have special requirements. Some businesses are in a special industry, or there're special requirements for their products or services. For this reason, there're designated dates for them to file taxes. In this situation, these companies fiscal year is chosen according to the designated dates.
To conclude, a fiscal year is a crucial period to reflect a company's operations, and a key for investors to evaluate a company. After understanding it, you won't ask a funny question like "why did Alibaba issue their earnings report for Q2, FY 2022, in 2021".