Determining Financial Year End
Rising Global Consultants
The Companies Act 2016 does not provide for a date on which the financial year begins or ends and therefore the Company is left to its own discretion to determine the date of the financial year, including any changes thereto.
Determining Financial Year End
Every company is obliged to prepare its first financial statements within 18 months of incorporation and to prepare and submit financial statements to the Companies Commission of Malaysia and the Internal Revenue Commission of Malaysia within six months after the end of each financial year. A company may extend its first accounting period up to 18 months from the date of incorporation to prepare its first financial statements.
Most companies usually choose to set their financial year to end on the last day of the calendar year (December 31) or the last day of any quarter (March 31, June 30 or September 30).
How to choose the end date of the financial year
The financial year end date of a newly formed company can be any date from the date of incorporation, as long as the financial cycle is within 18 months. However, we recommend that the first financial year end date be set at or before the twelfth month after incorporation. This is to allow sufficient time for the directors to complete and prepare the company’s accounts and for the auditors to prepare and submit the audited financial statements to the Companies Commission of Malaysia. Also, avoid setting the financial year end date during peak periods (e.g. March, June, September and December) to minimize the likelihood of overlapping with other companies’ reporting cycles.
Main considerations in selecting the financial year
There are some of the key factors to focus on when determining a company’s financial year-end date. These factors include the operating cycle of the company’s business, financial and audit lead times, tax planning needs, and avoiding overlap with other companies’ peak financial reporting periods.
Business cycles
The fiscal year end date does not have to coincide with the date of incorporation, nor does it have to coincide with the end of the calendar year. The ideal fiscal year end date actually has more to do with your business cycle, which varies from company to company.
Companies that manage a lot of inventory may want to consider choosing a fiscal year that corresponds to the end of the peak season and may be the time when inventory levels are at their lowest. This means there is no need to order large quantities of stock, which reduces costs and improves accuracy. In addition, the quietest period of the year in the market, with fewer transactions, is a time when it is easier to close out accounts and support staff have more time to deal with them.
Taxable period
Generally, a company’s basis period (i.e. tax period) is the same as the accounting period of a company. The first accounting period is the one-year tax assessment period when the accounts are closed. This will be the first year that the entity is assessed for tax.
The earlier the fiscal year end date, the earlier the company can file its tax return, and choosing a later fiscal year end date means that it can file its tax return and pay its taxes later.
Fiscal year synchronized with parent company
Section 247 of the Companies Act, 2016 provides that the financial year of a subsidiary company must coincide with that of the parent company. The parent company of a NFC shall take such measures as may be necessary to ensure that the financial year of any company shall coincide with that of the parent company within two (2) years after it becomes a subsidiary of the parent company. Nonetheless, if the subsidiary company has a good reason to continue with a different financial year, then the parent company may apply in writing to the authorities in accordance with Section 247(3) of the Companies Decree 2016.
Other factors
Some companies’ financial year choices may be affected by other factors, such as franchise agreements, affiliation agreements, etc. These factors need to be considered and planned for to ensure that the financial year election is executed successfully and that it maximizes cost benefits and tax advantages for the company. Proper planning of these factors will help the company to achieve optimum results in financial management.
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