Even though its fiscal year starts on October 1, the federal government still hasn’t passed a budget for FY 2023. President Biden signed a stopgap funding measure with hours to spare, to keep the government open until December 16 (and well past the November midterm elections).
The federal government used to follow a fiscal year calendar that started July 1, but that changed in 1974 with the passage of the Congressional Budget and Impoundment Control Act, which created the nonpartisan Congressional Budget Office. Congress voted to move the start of the government’s fiscal year from July 1, partly in response to what many saw as President Nixon’s overreach into the Congressional budget process. Nixon would impound funds that Congress had already appropriated when he considered the programs they funded to be “fiscally irresponsible,” according to Politico.
By moving the start of the fiscal year, the thinking went, Congress would have more time to respond to a president’s budget proposals. Ah, such giddy optimism.
Of course, the federal government is able to take temporary measures to ensure its programs are funded and its employees are paid that businesses can’t. The FY 2022 budget was passed six months late, and every so often—especially with a divided Congress—the government shuts down if temporary funding measures aren’t in place.
But once a business chooses a fiscal-year calendar—whether it’s July 1 to June 30, October 1 to September 30, or January 1 to December 31—it usually sticks with that calendar. As a March paper from PwC notes, while changing the end date of a company’s fiscal year “can yield many benefits,” it’s a huge undertaking “with operational impacts far beyond financial statements.”
That’s why businesses don’t just decide to change the dates on a whim, Jason Schloetzer, faculty affiliate at Georgetown University’s McDonough's Psaros Center for Financial Markets and Policy, told CFO Brew. It usually happens just before a private company goes public, or, when a company makes changes that will mean it’s competing in a different industry.
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“In general, we’re thinking about industry peers that we want to be comparable to—that’s a major driver. And smoothing out seasonality is, I think, the second main driver,” he said. Schloetzer said a company might change its fiscal year calendar when it’s gone through a reorganization and perhaps added or shed some lines of business.
Another time a new fiscal year calendar makes sense is if a company dramatically changes its strategies. Schloetzer offered the scenario of a retail company that may have a technology dimension. “If that company is split in two, for example, one might think that the retail portion might change its fiscal year ends and be more in line with the retail industry, and [the] technology portion might have a fiscal year end that’s different and is more in line with those types of peers now that the company has has split in two.”
The company would have to change all its financial reporting processes, its budgeting processes, and things like executive compensation plans, which are pegged to a particular calendar. Prior-year numbers might also have to be re-audited, Schloetzer added.
“There’s quite an undertaking inside of the firm when you want to make this kind of change,” he said.
Just changing the dates on a fiscal year isn’t necessarily viewed externally as a negative or a positive, Schloetzer said, unlike when a company announces cost-cutting measures. “I think if there was any kind of market movement, it would be because of enhanced comparability across peers,” he said.
Schloetzer added that a company’s decision to change its fiscal year is most likely going to be part of a larger strategy. “I don’t think boards are sitting around thinking, ‘We’re going to miss this year’s numbers, so let’s change our fiscal year.’”—KL