A company year, more commonly termed a fiscal year, is the consecutive 12-month time period a company adopts for accounting and tax purposes. The selection of a company year is required by government regulators and tax authorities. It also forms the basis of international accounting standards. Companies have the authority to set their own company year and can start or end the year based on business cycles or any other need. Once a company adopts a company year, it can be changed if necessary, but not without some difficulty.
Businesses are required to report on their operations. Some types of businesses, such as public corporations, have public disclosure requirements that are mandated by law. Other types of businesses may not have to report on their operations to the public, but they do have to report their earnings to local and national tax authorities. These reporting requirements are tied to 12 months of consecutive operation. Typically, these 12 months will correspond to a calendar year that starts on January 1 and ends on December 31, though some begin on dates throughout the year.
Governments give businesses the authority to decide when their company year begins and ends. If the company does not make a specific selection, the option will default to a calendar year. In the context of reporting requirements, agencies are interested in making sure that businesses report for the entire time they are operating, not in the way they chop up that time. Consequently, businesses are allowed to decide that their company year should begin and end according to some business need that does not correspond to the calendar year. This designation of a natural year is ordinarily ties to the flow of a company’s business cycle.
Using a natural year as a company’s fiscal year means that the official start of the company’s accounting and tax year is some month other than January. For example, a business in the education industry that supplies schools may decide that it is more natural for them to setup the company’s accounting to correspond to the school year cycle. So the company year would begin on August 1 and end on July 31, to match the company’s clients. This ensures that the company’s cashflow matches the way it receives payments from its major clients.
The choice of a company year is not set in stone. If there is a pressing business need, a company can change its fiscal year. Typically, a business must notify and receive approval from tax authorities before this change is made, since taxation is the most important factor that will be affected by the change. Most tax authorities will not unreasonably withhold approval, however, since there are many legitimate business reasons for changing a company’s accounting practices.