How To Determine The Financial Year End Of A New Company?

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What is it all about?

The financial year-end is an exercise in which the company determines the financial statement of the company, whether that period is a year or not. It is generally known as the financial year, which in return refers to a company’s accounting period, a range of time in which a profit & loss account and balance sheet are made up.

When to prepare?

Generally, a Company is required to prepare its financial statements within 18 months from the date of its incorporation and subsequently 6 months of its financial year.

How to prepare?

An auditor will be appointed to audit the company’s financial statement. Once that is done, the statement will have to be approved by the board of directors before it is circulated amongst its shareholders, directors, auditor and debenture holders.

Once the audited financial statements are completed, prepared, circulated and approved, the company will have to lodge its audited financial statements and reports within 30 days to the Companies Commission of Malaysia (CCM)/ Suruhanjaya Syarikat Malaysia (SSM) and the Inland Revenue Board of Malaysia (IRB).

A quick tip on this issue:

It is advisable that the company should not fix its first accounting period at the 18-month dot/ should fix its first accounting period before the 18 months deadline. This will allow the auditor some time to prepare the audited financial statements, to get it approved and to lodge it within the 18 months time limit;
If there is a change of accounting period, a company must notify the IRB in the prescribed form (CP204B) of the change in their accounting period by the prescribed due date1:
1. For the accounting period of new accounts that are less than 12 months – 30 days before the end of the new accounting period;
2. For the accounting period of new accounts that are more than 12 months – 30 days before the end of the original accounting period.

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Factors to consider when choosing/ determining a financial year

Ideally, choose a date for the financial year which coincides with the company’s business cycle. It does not need to be the date of incorporation or the end of the calendar year. Below are some of the factors that affect a company’s business cycle:

A. TAXATION PERIOD

Both the financial year and taxation period are usually the same². Therefore, the date that a company selected to be its financial year will affect when corporate taxes need to be paid as well- the sooner it is, the sooner the company have to file/ the later it is (provided it is within the financial year period), the more time the company would have to file and pay the corporate taxes.

B. INVENTORY

A financial year with less inventory is definitely more ideal, as this would mean that:

The company has less inventory to be counted, which decreases costs and increases accuracy; and
It also makes it easier to close the books as there are fewer transactions in process and more time available from support staff to do due diligence on it.

C. HOLDING COMPANY

The Companies Act³ notes that the financial year of a subsidiary company must coincide with its holding company. In this regard, the company:

Shall take such necessary steps to ensure that within two years after any corporation becomes a subsidiary of the holding company, the financial year of that corporation coincides with the financial year of the holding company⁴;
Shall take such necessary steps to ensure that within two years after any corporation becomes a subsidiary of the holding company, the financial year of that corporation coincides with the financial year of the holding company⁵; and
The holding company may apply in writing to the Registrar for the subsidiary company to have a different financial year if there is good reason for the subsidiary to continue having a different financial year⁶.

D. OTHER FACTORS

Other factors that might come into play are, for example: what was agreed upon by the company with other relevant parties in its agreements with those parties involved.

Therefore, it is advisable for the company to take some time and ponder on what is the best date for such an exercise, as the date would either make the company’s life easy or vice versa.

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