What is a Financial Year End
According to Section 2 of the Companies Act 2016, financial year of any corporation is the period of which any financial statements of the company is prepared no matter if that period is a year or not. In general, financial period is the accounting period of a company.
It is a requirement for a company to prepare Financial Statements for a financial period not more than 18 months from the start of incorporation date and within 6 months for the subsequent year. Then, the company should submit the Financial Statements to Companies Commission of Malaysia or Suruhanjaya Syarikat Malaysia (SSM) and the Inland Revenue Board of Malaysia or Lembaga Hasil Dalam Negeri (LHDN).
How determine the financial year end of a new company
Since there is no specific date on which a financial year shall end, the financial year end of your company is completely based on your own discretion and it can be any date, as long as it is within 18 months from your company’s incorporation date.
Most of companies will opt for the last day of calendar year (i.e. December 31) or the last day of any quarter month to fix their financial year-end. However, it is not necessary to choose 31 December as your financial year-end. You are free to choose 31 March, 30 April or even 31 October as your financial year end.
If you are a newly incorporated company, fixing your first financial year-end will be straight forward. You can instruct your company secretary and they will prepare the necessary – First Board Resolution to resolve the fixing the financial year-end.
What to consider when fixing your Financial Year End
- Group Policies and Financial Reporting– If your company is a subsidiary or associate of a holding company, your financial year-end may need to comply with the group financial year-end for the purpose of consolidation reporting
- Taxation Period– In general, the basis period or taxation period falls at the same time as the accounting period. As your financial year ends, you have to file and pay for your corporate income tax and hence, it is advisable to select a date that will allow you to file and pay your corporate taxes accordingly.
- Peak Period– To fix your Financial year-end date, you should avoid fixing financial year-end during the peak periods, for instance, during March, June, September, or December. Opting for a less busy time will increase the accuracy as less transactions is in process. However, it is ideal to think of your business cycle as a benchmark to fix your financial year-end, which is different for each business.
Change of Financial Year-end
Businesses at times may be changing its financial year-end for various reasons such as:
- To comply with group financial year-end;
- To organize resources and manage deadlines;
- To optimize tax planning opportunities and etc
To change financial year-end, you need to plan and prepare in advance the following:
- To work with the company secretary to plan the deadline for financial statements and apply extension with SSM as necessary. You will also need to pass a resolution for the change in financial year-end.
- To work with the tax agent to notify the Inland Revenue Board (IRB) in the prescribed form CP204B of the change in their accounting period.
- If the new accounting period is < 12 months, notify 30 days before the end of the new accounting period
- If the new accounting period is > 12 months, notify 30 days before the end of the original accounting period
The notification of change of accounting period to IRB is only imposed after YA2019 when the IRB issued Public Ruling 8/2019. This impose additional requirement and the company needs to plan in advance if you wish to change your financial year. Effective YA 2019, if a company, limited liability partnership, trust body or cooperative society fails to furnish the Form CP204B in the prescribed period, the following penalties will be imposed:
- late filing penalty and penalty raised on estimated assessment
- 10% increase in failure to make tax installments
- fine between RM200 to RM20,000 or imprisonment for a term not exceeding 6 months or both; upon conviction
Despite these few considerations, you shall make a decision when to fix your financial year end based on how easy that will be to be carried out, and also cost-effective.
