Differences Between Fiscal Year and Calendar Year

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What is a Fiscal Year?

A fiscal year is a year in which business organizations/ firms/ companies/ entities prefer preparing their financial reports for the year. This year may not be the same in all the countries. In a fiscal year reporting method, companies may choose to prepare their financial statements on a different twelve-month basis and not the same as the calendar year.

It is 12 months used for calculating and preparing annual (“yearly”) financial statements in businesses and other organizations worldwide.

Let us look at Procter & Gamble (P&G) Financial Reporting.

We note that P&G uses a different year ending for reporting its Financial Statements than that of Colgate. P&G uses a fiscal year ending June 30.

What is Calendar Year?

A year is defined as the time taken by the earth to make one revolution around the sun.

Now, what is a Calendar Year? Generally speaking, it is a year that begins on the New Year’s Day of a given calendar system and ends on the day before the following New Year’s Day, and thus consists of a whole number of days. Different calendar years like the Islamic Calendar, the Gregorian Calendar, etc. One which is most widely used in the Gregorian calendar. It begins on January 1 and ends on December 31, consisting of 365 days (366 days once every four years).

In a calendar year reporting method, companies will prepare their financial reports/ statements for the year based on the transactions that have taken place on the 1st of January and will incorporate all other transactions that have taken place until the 365 days of the year 31st December.

Colgate reports its financial statements for years ended December 31. It simply means that Colgate uses Calendar Year (1st January – 31st December).

Calendar vs. Fiscal Year Retailer Case Study

Let us take an example of a Retailing Business. Seasonality in retailing business is generally seen in December and January holiday months, where sales are usually higher than in the other months.

Let us also assume that a retailer, Coy R had bumper sales in Dec’15 and Jan’16. However, it underperformed in Dec’16 and Jan’17.

Case 1 – If Coy R follows Calendar Year

If the management prepares its financial statements using the Calendar year, then will be two implications –

  • The high-performing month of Dec’15 is included with the 2015 year ending results.However, one high-performing month of Jan’16 and one underperforming month of Dec’16 is incorporated into the 2016 results.

When we compare 2015 results with that of 2016, we note that the comparison is not fruitful, as the full effect of seasonality is not captured.

Case 2 – If the retailer follows Fiscal year

If the retailer chooses a fiscal year different from the calendar year (say 1st April to 31st March), then.

  • FY2016 (1st April 2015 to 31st March 2016) will include the high performing months (Dec’15 and Jan’16)FY2017 (1st April 2016 to 31st March 2017) will consist of the underperforming months (Dec’16 and Jan’17)

When we compare FY2016 with that of FY2017, we can effectively contrast an excellent season with that of a poor season, thereby effectively capturing the seasonality.

This is why the Fiscal year is beneficial.

Fiscal Year vs. Calendar Year Infographics

Key Differences

  • The critical difference between a fiscal year and a calendar year is that the former can start on any day and end precisely on the 365th day. In contrast, the latter begins on the first of January and ends every year on the 31st of December.A calendar year begins on a particular year and ends on the last day of that year. In the case of the fiscal year, two different consecutive years are most likely to fall into one reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization’s financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more, and this is never going to happen in the case of a calendar year.It entirely depends on the dates chosen for the beginning and end of the fiscal year. For example, a company wishes to have a fiscal year starting the 1st of April, 2015, and the same might end on the 365th day from the beginning date, that is 31st of March, 2016. In this way, the company has a fiscal year that successfully covers two consecutive years. In the case of a leap year, a calendar year will necessarily have a leap year that is 365 days, whereas a fiscal year may or may not have a leap year.The level of difficulty and challenges faced in auditing and accounting mechanisms can be minimal in the case of companies that follow the calendar year compared to the companies that follow the fiscal year.This difficulty and level of complications faced in accounting and auditing can be met by companies that do not follow a consistent pattern of the fiscal year, or in other words, the companies whose fiscal year changes year after year. It is difficult for them to record financial transactions and get the same audited with payments and tax records.

Comparative Table

Examples

#1 – Apparel Stores

The below table shows the top 15 companies by Market CapitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more  ($ million) in the Apparel Stores sector. As we see from the example of Retailer, with December and January being the best performing months, we note that most Apparel stores do follow the January end fiscal year policy.

source: ycharts

#2 – Global Banks

The below table shows the top 10 Global banks by Market Capitalization ($ million). We note that they all follow the Calendar year-end for financial reporting purposes.

#3 – Education Sector

The below table shows the top 10 education companies in the US by market cap ($ million). Some follow the calendar year, while New Oriental Education has 31st May. Likewise, DeVry education has 30th June as financial statementFinancial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more year-end. Some follow the calendar year, while New Oriental Education has 31st May as year-end. Likewise, DeVry education has 30th June as fiscal year-end. We note no clear trend in using the financial statement year-end.

Fiscal Year vs. Calendar Year Video

This has been a guide to Fiscal Year vs. Calendar Year. Here we discuss the top differences between them along with a case study, practical example, and comparative table. You may also have a look at the following articles-

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