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What is a Fiscal Year?

definition

A fiscal year (often abbreviated “FY”) is a 12-month period used by companies and governments for financial reporting and budgeting that sometimes follows the January - December calendar year and sometimes doesn’t.

🤔 Understanding fiscal year

Calendar year, fiscal year, financial year, tax year... These are all terms that refer to 12-month periods but have different meanings. Every business has a fiscal year or financial year. A fiscal year is a company’s annual financial or accounting reporting period. Sometimes it fits perfectly on the Jan - Dec calendar hanging on your kitchen wall, other times it straddles two calendar years. A fiscal year starting on July 1, 2018, and ending on June 30, 2019, refers to the fiscal year 2019, or FY 2019. The federal government’s fiscal year goes from October 1 through September 30. Fiscal year-end is the end of a fiscal year.

example

Microsoft’s fiscal year doesn’t coincide with a calendar year, as it runs from July 1 to June 30. So, June 30 is its fiscal year-end. For instance, the fiscal year 2019 ended on June 30, 2019. After June 30th, 2019, fiscal year 2020 begins with the first quarter of the FY 2020, which started on July 1, 2019.

Source: Microsoft Earnings Release FY19 Q4

Facebook’s fiscal year perfectly follows a calendar year, as its fiscal year ends on December 31. So, FY 2019 will end on December 31, 2019. On Jan 1, 2020, Facebook’s fiscal year 2020 begins with the first quarter of FY 2020.

Source: Facebook Press Release, January 30, 2019

Takeaway

You learned when you were a kid that the year starts in January and ends in December. But did you know that there are other kinds of years? Fiscal year is one of them.

The NBA season runs from October to July. So they kind of have a fiscal year - a period that defines their "year" that doesn't coincide with the calendar. On the other hand, baseball’s season does coincide with the calendar as their season runs from March to October. Companies’ fiscal years are 12-month periods that sometimes follow the Jan - Dec calendar, sometimes don’t.

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Tell me more...

What does FY 2019 mean?
What does fiscal year-end mean?
What motivates companies to choose different fiscal years?
Can a company change its fiscal year?
How a tax year differs from a fiscal year?
What is the federal government fiscal year?
What is a quarter?

What does FY 2019 mean?

FY is an abbreviation for “fiscal year,” and 2019 is the year during which the fiscal year ends. When talking about a fiscal year, the year during which the closing date falls determines the fiscal year. So, a company with a fiscal year starting on September 1, 2018, and ending on August 31, 2019, will call that period FY 2019. If the same company refers to an expense that occurred on November 10, 2018, it will label it as an expenditure for FY 2019.

What does fiscal year-end mean?

A fiscal year-end is the end of a fiscal year. A fiscal year-end typically ends on the last day of a quarter, such as March 31. A company that follows a calendar year will have December 31 as its fiscal year-end.

Public companies typically release their financial statements every year, a few weeks after year-end. A balance sheet and income statement are parts of the financial statements published. So, knowing a company’s fiscal year-end can help you watch out for its earnings release. For example, Microsoft’s fiscal year-end is June 30, and it released its fiscal year 2019 results on July 18, 2019. You can find the fiscal year-end of a company in its financial statements.

What motivates companies to choose different fiscal years?

Companies should select their fiscal year carefully, as it may impact their finances. Here are some factors that motivate companies to choose different fiscal years:

  1. Business seasonality: While a fiscal year based on a calendar year may be simpler, it is not always a good idea from a financial standpoint. A company might benefit from adopting a customized fiscal year. The reason is that most companies have a natural seasonality - They make more sales in some quarters than in others, and that repeats from year to year. For example, Apple makes lots of money during the holiday season when parents are buying new iPhones or new iPads for their kids.

    By choosing a fiscal year that ends in the quarter where sales are higher, the year-end numbers appear to be better. For example, a retail business usually makes most of its sales during the holiday season. Ending its fiscal year on January 31 will allow the company to capture all its holidays’ sales in its last quarter, which can make it look like the company’s performance is improving towards the end of the year.

  2. Cost savings: A company can potentially save on accounting and audit fees by choosing a fiscal year that doesn’t end on December 31. Many companies follow a calendar year and hire external accountants to help them file their taxes. For this reason, accountants will usually be busier and charge higher fees for companies with fiscal years ending December 31.

  3. Start date: The start date of a company can determine when it will start its fiscal year. For example, if a company begins its activities in April, it might want to end the year in March to capture revenues and expenses for a whole year.

Can a company change its fiscal year?

A company can change its fiscal year if it wants to. Motivations to change fiscal year are generally strategic or financial reasons. For instance, a company making most of its money in August could change its fiscal year so that it ends in August or September.

The IRS asks companies wanting to change their fiscal year to file an amended tax return with a request to change their fiscal year. They have to file Form 1128 to get IRS approval. Companies cannot simply file for an extension or apply for a new taxpayer identification.

How a tax year differs from a fiscal year?

A tax year is how the IRS calls a year for tax purposes. The IRS says that a tax year is an annual accounting period for keeping records and reporting income and expenses. In short, a tax year is the 12-month period that a tax return covers.

The IRS distinguishes “tax year” from “fiscal year.” Indeed, corporations can choose either a fiscal year or a calendar year as their tax year.

That means if a corporation’s fiscal year ends on December 31, it is using a calendar year for its business tax year. If a corporation doesn’t follow a calendar year for its fiscal year, then it can use its fiscal year as its tax year. So, a corporation with a September 30 fiscal year-end may also file a tax return that will be effective on September 30. The IRS calls companies that fill their taxes on a fiscal year basis “fiscal year taxpayers.”

However, individuals and businesses taxed as a sole proprietorship must use a calendar tax year. So, when you filed your taxes for the tax year 2019, it covered the period from January 1, 2018, to December 31, 2018. You couldn’t choose any other period to file your taxes.

A short tax year is a tax year that is less than 12 months long. This happens when a company starts its activities after the first month of its tax year or end them before the last month of its tax year. So, the tax return will cover less than 12 months.

What is the federal government fiscal year?

The federal government’s fiscal year defines the U.S. government’s budget period. This fiscal year differs from a calendar year, as it runs from October 1 of the budget’s prior year through September 30 of the year we are talking. Newly elected officials can thus take part in the budget process during their first year of service.

Here are some examples of the federal government’s fiscal years:

  • FY 2018 started on October 1, 2017, and ended on September 30, 2018;
  • FY 2019 began on October 1, 2018, and will end on September 30, 2019;
  • FY 2020 is the fiscal year that will start on October 1, 2019, and end on September 30, 2020.

A company could choose a fiscal year ending on September 30 if it’s doing a lot of work with the U.S. government. That way, its fiscal year-end will match the government’s fiscal year-end.

What is a quarter?

A fiscal year is divided into quarters for financial accounting and reporting purposes. Since a quarter last three months, there are four quarters in a year.

A fiscal year starts at the beginning of a quarter, like April 1, and ends on the last day of a quarter – in that case, on March 31.

In a calendar year, the first quarter (Q1) starts on January 1 and ends on March 31. The second quarter (Q2) goes through April 1 to June 30. The third quarter (Q3) is from July 1 to September 30, and the fourth quarter (Q4) is from October 1 to December 31. Q1 2019 is the abbreviation for the first quarter of 2019. As with fiscal year, companies can have fiscal quarters different from calendar quarters. But fiscal quarters must match their fiscal year.

In the stock market, the earnings season starts with the beginning of each quarter. Public companies must file earnings reports every quarter. These reports give essential information about a company, like revenue, profit, EPS, expenses, and cash flow. Management generally discusses business opportunities and challenges faced in the current quarter.

The annual report covers an entire fiscal year. It is larger than a quarterly report and gives more information about a company.

Many investors look at quarterly and annual reports before investing in a company. These reports assist in comparing a company’s earnings to the same period in the previous year to see if its financial situation has improved.

Quarterly reports are important since stock prices are very sensitive to quarterly earnings results. Generally, if a company beats analysts’ estimates, its stock price will rise. But if the results are weaker than expected, the stock price will drop.

Disclosures: iPad and iPhone are registered trademarks of Apple Inc. Information presented here is for informational purposes only and is not to be construed as tax advice.

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