What is Periodicity Assumption?
Periodicity assumption is the principle for the company to use as the basis to prepare a financial statement. Each company may have a different financial period due to government, internal management, shareholders, and other regulation. It is also called the company fiscal year.
Most of the company follow the calendar year which starts at January and end with December) as the basis to prepare a financial report. However, there are still other companies that end their report in June or September each year. As it is the requirement from their group or local government.
Company fiscal is the period of one year, but it is not necessary to start in January. The company selected different starting month base on various reasons.
Why Company Uses a Different Fiscal Year?
| Reasons | Description |
|---|---|
| Group Policy | As for the subsidiaries, the report must be consolidated with the parent company. So the subsidiaries must follow the parent’s fiscal year event it is different from the calendar year. |
| Internal Management | The top management may decide to set a fiscal year other than the calendar year which enables them to review reports on time. They may be busy during the calendar year-end. This practice mostly happens in a small company that is not involved with a complex transaction. |
| Revenue Cycle | The company may set the fiscal year base on the revenue cycle to ensure the accuracy of the income statement. It would be hard to record accrue revenue at the end of the year and the amount is significant. It is popular for the agriculture business. |
| Management Requirement | In some circumstances, management requires a special report for a specific purpose and the period can be different from the calendar year. For example, the company needs to appraise a new project that will cover 18 months period. So they ask for the report over that period. |
| Local regulation | In some countries, the local regulators require the company to prepare a separate report for them. Failing to meet the requirement will result in noncompliance and face subsequent penalties. |
Example of Periodicity Assumption
Company ABC Limited provides a service of $ 100,000 to one of the clients. The work has complete around 50% at the year-end. As it is the end of the accounting period, the company must accrue a revenue of $ 50,000 ($ 100,000 * 50%) into the financial statements.
Inconsistent Accounting Periods
The company should have a consistent time period for the annual report, however, it is possible that the fiscal year of one company change from time to time. It happens due to two reasons below:
- Partial Start or End: The company starts the operation during the financial year, so the first account report will be shorter than the normal one. It also happens when the company ends its operation before the year-end.
- Four-week period report: some company requires to produce a report every four weeks rather than one month. So there will be 13 accounting reports per year.
Advantage of Periodicity Assumption
| Advantages of Periodicity Assumption | |
|---|---|
| Easy to review | Management will be able to review financial reports consistently based on the predefined time periods. They may require to review on a weekly, monthly and take the required action before it is too late. |
| Comparable | External users are able to compare reports from one company to another. |
| Separated financial information | Rather than put everything together in the annual report, we can separate financial reports into monthly or semi-annual. It will allow the users to look closely at the report. |
| Timely report | When we have the weekly report, management will be able to review them on time. It will be less useful if we wait and put it in the annual report. |
