Financial year

In what cases is it worth choosing a financial year that is different from the calendar year?

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By:
Kalender Grant Thornton Baltic
Contents

Annual reports must be filed with the Commercial Register within six months of the end of the financial year.

According to the registrar's statistics, 95% of companies registered in Estonia have chosen a financial year that runs from 1 January to 31 December. Yes, chosen. The end of the financial year is not set by the government, legislation or auditors but the enterprise. Nor does the financial year have to begin on the first day or end on the last day of a month. There are thus 365 different possibilities for the last day of a financial year. There are other interesting solutions elsewhere in the world. Apple Inc's financial year is moveable; it ends on the last Saturday of September. The Apple example can’t be used in Estonia, but shows a concerted approach to choosing when the financial year ends.

Financial years should end along with the business season 

A company’s fiscal year should reflect the cycle of the company’s operating activity and year-end procedures should be conducted at a time when volumes of activity are lowest. Companies with large inventories of goods would do well to have their financial year end at a time when the goods in stock is at a minimum. That means that large transactions have been completed, goods have been sent, returns of orders have been processed and quantities in stock are at a minimum. This makes it easier to compile the financial statements: less time has to be spent on inventorying stocks, not to mention that this also simplifies making management estimates for the purpose of the annual report (refunds, probability of collecting accounts receivable, impairment of inventories) since the majority of transactions have been completed as of the end of the season. Some of the largest overseas-based retailers, Target and Walmart, have their financial year end on 31 January.

A primary goal of financial reporting is to give a true and fair view of the results of a company’s economic activity and financial position. When choosing a financial year, also make sure that income and expenses within the same operating activity cycle or season fall into the same financial year. If the expenses for preparations for the season are in one annual report but the income earned is in the next annual report, it distorts the net result for the accounting period. Sectors that might have a cycle that varies from the calendar year include agriculture, tourism, education, consultation and forestry.

Review your financial year closing date!

A properly selected financial year also helps simplify the budgeting process. If possible, reserve the budgeting and laying plans for the new financial year for the low season instead of increasing the already high workload during peak season. 

The fact that 95% of the market needs annual reports compiled and audit services at the same time naturally drive up workloads and demand during that period. With this in mind I urge CFOs and all entrepreneurs in general:  consider whether your financial year end date of 31 December is actually justified and if it isn’t, find a more suitable one. That will allow accountants and auditors to spread out their workload, work together better, and for customers, also enjoy a lower price. 

How to change the financial year?

The financial year can be changed at any time. It is only worth remembering that the length of the financial year cannot exceed 18 months. For example, if the company's financial year is currently a calendar year, but you want the end of the new financial year to be 30.06, then by making the change today, it will already apply to the 2023 financial year. In other words, the 2023 financial year can currently be extended by a maximum of six months, i.e. until 30.06.2024. In this case, the deadline for submitting the annual report to the business register is 31.12.2024.

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