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Fiscal Year Role in Accounting, Finance, and Budgeting
Meaning, Explanation, Examples

 

At start up, companies and organizations define a fiscal year which may or may not correspond to the calendar year. The fiscal year serves as the organizing basis for budgeting, planning and financial reporting in subsequent years.

Once the firm defines its fiscal year, governments and regulatory authorities make it very difficult to change the definition.

What is a Fiscal Year?

The fiscal year (FY, or financial year) is usually the primary accounting year for a company, organization, or government. The fiscal year serves as the organizing basis for financial measurement and financial reporting.

In most countries, moreover, the fiscal year also serves as a basis for budgeting and planning.

  • The fiscal year is usually one year in length, composed of 4 fiscal quarters. The fiscal year may or may not correspond to the calendar year.
  • The firm's accounting cycle may correspond to a fiscal year or to a calendar year.
  • Most firms also plan budgets in terms of fiscal years. This means they plan spending and revenue intake to cover the period of time between fiscal year start and end. Some government groups also prepare annual plans, but two-year (biennial) budgets are also common in government.
  • The fiscal year may or may not coincide with the firm's tax year.

Explaining Fiscal Year in Context

Sections below further define and explain fiscal year, in context with related concepts including:

Fiscal Year FY
Fiscal Quarter Q
Calendar Year
Accounting Cycle
Budget Cycle
Operating Cycle
Operating Cycle
Tax Year
Fiscal Month

 

Contents

Related Topics


 

The Fiscal Year Cycle
Business Firms Must Manage Several Cycles

Business firms must manage and plan several kinds of "years" and "cycles," all at the same time. The firm's fiscal year is one of these, but they must also manage other periodic cycles as well. All of these cycles can cover different time periods, and all have an impact on business operations. Planning and control are easiest, however, when the various cycles are synchronized with each other.

Very briefly, fiscal year and other important cycles are defined as follows:

Calendar Year

The calendar year, of course, begins 1 January and runs through 31 December—always. Calendar days and years are defined by solar events, moreover, which means they are absolutely fixed. Calendar days and weeks impact business operations by determining when the firm opens or closes for business.

Fiscal Year

Fiscal year is a concept in financial accounting and reporting. The fiscal year is one calendar year in length--or approximately that. For all intents and purposes, the fiscal year is the firm's accounting year. The annual accounting cycle runs exactly the length of the fiscal year.

By contrast with the calendar year, the fiscal year starting date is a matter of choice. New firms starting in business normally define their own fiscal year by choosing a calendar start date that best serves them for managing other cycles, such as their operating cycle, budgeting cycle, and tax reporting year. Once defined, however, governments, tax authorities, and regulatory bodies make it very difficult to change the fiscal year definition.

Budgeting Cycle

Business firms normally develop and use budgets on a periodic basis at fixed intervals. The norm in private industry is to produce a budget for each fiscal year. Some government organizations also prepare annual plans, but two-year (biennial) budgets are also common in government.

Operating Cycle

The term operating cycle refers to the length of a time period, but not necessarily to specific calendar dates. For manufacturing companies and for retail businesses, the operating cycle is the length of time required between receipt of inventory and sale of the same inventory. Depending on the firm's line of business, the operating cycle may cover days, weeks, months, or longer.

Operating cycle knowledge is important for budgetary planning because the cycle represents the full time period for which the firm has invested in inventory, but not yet received payment for the finished goods. This is the length of time, that is, the firm must be able to fund inventory storage, handling, manufacturing, sales operations, and shipment.

Tax Year

National governments typically define the tax year as the 12 month period for which tax-paying companies report and pay their tax liabilities. In most cases, the required tax filing date comes a few months after the end of a calendar year, for which taxes are due. In the United States, for instance, taxpayers must file (pay) by April 15 taxes due for the calendar year ended three and a half months earlier.

Some countries also permit companies to define a tax year that corresponds to the firm's fiscal year. In such cases, the payment is due on a specified date several months after the end of the company's fiscal year.

How Do Companies and Governments Choose a Fiscal Year?

A company's fiscal year may coincide with the calendar year (as, for example with IBM), but companies, organizations, and governments are free to choose other starting and end points for their fiscal year when they first start operations or start the business. Fiscal year dates that begin and end in mid Summer are sometimes chosen by universities, for instance, so as to synchronize fiscal years with academic years. Once a fiscal year is specified, however, governments and tax authorities make changing the fiscal year definition a difficult process.

Note that some companies and organizations define their fiscal year so as to close always on the same day of the week (for example, the Friday closest to 31 December). Under such a rule, some fiscal years cover 52 weeks, others cover 53 weeks.

When the fiscal year begins mid calendar year, some organizations refer to the fiscal year by two calendar year numbers. The Australian government fiscal year 2013 / 2014, for instance, begins 1 July 2013.

Company Fiscal Years

Some companies have fiscal years defined as follows:

  • Ericsson: 1 January through 31 December.
  • Hewlett Packard: 1 November (previous year) through 31 October.
  • IBM: 1 January through 31 December.
  • Microsoft: 1 July through 30 June.
  • Siemens: 1 October (previous year) through 30 September.

Government Fiscal Years

A few government fiscal years are defined as follows:

  • The United States government uses a fiscal year running 1 October (previous year) through 30 September. These dates also define the fiscal year for the governments of American Samoa, Guam, Hati, Laos, Micronesia, and Thailand.
  • Governments with fiscal years defined as 1 April through 31 March include:
    Brunei, Canada, India, Jamaica, Japan, South Africa, and United Kingdom.
  • Governments with fiscal years running 1 July through 30 June include:
    Australia, Bahamas, Bangladesh, Kenya, Egypt, Pakistan, Puerto Rico, New Zealand, and Uganda.
  • The fiscal year is the same as the calendar year for many countries, including:
    Argentina, Austria, Bahrain, Belgium, Brazil, Bulgaria, Chile, China, Colombia, Croatia, Cuba, Czech Republic , Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland (since 2002), Ireland, Latvia, Lebanon, Lithuania, Luxembourg, Korea, Malaysia, Macedonia, Mexico, Morocco, Netherlands, Nigeria, Norway, Oman, Panama, Paraguay, Peru, Portugal, Qatar, Russia, Saudi Arabia, Singapore, Slovakia, Spain, Sweden, Ukraine, and the United Arab Emirates.

Finally, note that a few governments start and end fiscal years differently from the tax year. The New Zealand government FY runs from 1 July through 30 June, for example, but the New Zealand tax year runs 1 April through 31 March.

Fiscal Years, Quarters, Months, and Weeks Can Vary in Length

Calendar years are always 365 or 366 days in length. Fiscal years for certain years, however, may be slightly shorter or slightly longer. For example, firms can move the FY ending date and the starting date of the next FY a few days away from the anniversary of the previous FY end, so as to close on a certain week day, such as Friday (end of business week) or Saturday (end of week).

Fiscal years, moreover, have components with names that sound like calendar year components, such as fiscal quarters, fiscal months, and fiscal weeks. Note especially that these components may be adjusted slightly, so that they differ in length from their calendar year counterparts. These adjustments are made, also, to close on a certain week day, such as Friday or Saturday.

Minor adjustments of this kind are normally of little or no consequence to potential investors or industry analysts. Such adjustments simply help internal accountants align budgetary planning and financial reporting, precisely..

Fiscal Year in Financial Accounting

For most companies, the fiscal year is also the accounting year—and therefore the reporting year. The company's published financial statements must have meaning for a specific time period and, for newly issued reports, this is the most recently ended fiscal quarter or year. When analysts and investors use financial statements to evaluate a firm's financial performance and financial position, they understand that the time period in view is the recent fiscal period.

Public companies normally publish four financial statements (reports) at the end of each fiscal quarter and year. These companies are required to publish the most recent (fiscal) year's financial statements in an Annual Report, which they must send to shareholders before the company's annual meeting to elect Directors. The same report and financial statements will be publicly available on the company''s internet site.

A line of text in each statement's header clearly identifies the fiscal year or fiscal quarter in view.

FY Accounting Report 1
Income Statement

The Income statement  reports the firm's revenues, expenses, and earnings for a fiscal period, usually a fiscal year (FY) or fiscal quarter (e.g., Q1, Q2, Q3, or Q4). More accurately, the Income statement reports activity in the firm's Expense and Revenue accounts for this period. The report arranges accounts so as to build a detailed version of the Income Statement Equation:

        Earnings = Revenues – Expenses

The Income Statement header states clearly that the report covers expenses and revenues for a specific period, e.g.,

        "... for the fiscal year ending 31 July 20XX."

See Income Statement for simple and complex Income statement examples.

FY Accounting Report 2
Balance Sheet

The Balance sheet  reports the status of the firm's Assets, Liabilities and Equities accounts at one point in time--usually the final day of the fiscal year or quarter just ended. Balance Sheet arranges accounts so as to present a detailed version of the Balance Sheet Equation:

        Assets = Liabilities + Equities

Analysts evaluate the firm's financial position by comparing balances in different account categories. Comparisons rely on financial metrics (or ratios) such as The Debt to Equity ratio and Return on Assets.

The Balance Sheet header clearly states that the report represents a snapshot of the company's financial position at one point in time:

       "... at the end of fiscal year ending 31 July 20XX."

See Balance Sheet for simple and complex Balance sheet examples.

FY Accounting Report 3
Changes in Financial Position

The Statement of Changes in Financial Position SCFP is also known as the Financial Cash Flow Statement or as the Funds flow Statement. The SCFP summarizes account activities that represent actual cash flow. This contrasts with the Income Statement, which summarizes all Revenue and Expense activities—cash and non cash. The SCFP report arranges accounts so as to build a detailed version of the Cash Flow Statement Equation:

      Change in Cash  = Sources of Cash – Uses of Cash

The SCFP, in other words, shows how the firm's cash position changes over a fiscal period.
The report header states clearly that the report covers cash inflows and outflows for a specific period, e.g.,

     "... for the fiscal year ending 31 July 20XX."

See Statement of Changes in Financial Position for simple and complex SCFP examples.

FY Accounting Report 4
Statement of Retained Earnings

The Statement of Retained Earnings summarizes dividend payments and contributions to Balance Retained Earnings for a period, usually a fiscal year or fiscal quarter. After a profitable period, firms normally use the period's earnings for either or both of these actions. The report arranges accounts so as to build a detailed version of the Retained Earnings t Equation:

      Period End Retained Earnings Balance  
                  = Beginning Balance
                      + Net Income 
                           – Dividends paid

The Retained Earnings Statement, in other words, shows how the firm uses the period's profits to build owner value. The report header states clearly that the report covers cash dividend payments and Retained Earnings contributions for a specific period, e.g.,

     "... for the fiscal year ending 31 July 20XX."

See Statement of Retained Earnings for a example report with more detail.

Fiscal Year in Budgeting and Planning

Business firms in private industry normally develop a budget for each fiscal year. Many government organizations also organize budgeting on an annual basis, but two-year (biennial) budgets are also common in government.

During the period of time between issuance of one budget and the next, organizations perform budgetary planning activities that make up the organization's Budget Cycle or Budget Process. In large and complex organizations, the budget process normally extends across months, and sometimes the entire fiscal year.

In large entities, responsibility for driving and managing the budgeting process belongs to a Budget Office. This office works with the organization's internal cost accountants and those who forecast incoming revenues, of course. However, the Budget office also closely with Department Heads, managers, and others, who will submit funding proposals for the forthcoming fiscal year. And, It works at the same time with officers, senior managers, and legislative bodies who approve spending. As a result, budget proposals for each fiscal year develop according to local policies and rules, while budget proposal packages are reasonable and align with business objectives.

Steps in the budgetary process

Budgetary planning in different organizations differs widely in detail and timing. Nevertheless, almost everywhere, the process looks closely at the forthcoming fiscal year and includes steps for:

  • Analyzing the previous fiscal year budget, focusing especially on variances between budget figures and actual spending.
  • Prioritizing business needs and objectives for the next fiscal year.

The budgetary process will also include steps for forecasting:

  • Incoming revenues.
  • Trends or changes that have spending or revenue implications, for instance:
    • New mandates to lower costs and reduce spending.
    • Increases or decreases in headcount or staffing levels.
  • Changing government regulations or requirements, such as:
    • Changing tax rates or new taxes.
    • Stricter requirements for environmental regulatory compliance.
  • Specific capital asset needs.
  • Requirements for infrastructure maintenance or upgrade.
  • Risks or emergencies that could impact incoming funds or spending needs.

The budgetary process, in other words, relies on individuals with detailed first-hand knowledge of the organization's operations and operating environment.

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