Transition to a different financial year – why, how, and what to consider?

Why change the period of the financial year?

The choice of a company's financial (fiscal) year period is a significant strategic decision, not just a note in the Business Register and articles of association. Many entrepreneurs choose the calendar year as their financial year without much consideration when starting operations, but as the business grows, there may be a need to change the period. The reasons for this are varied. In Estonian practice, the usual need is to align the financial year with the parent company’s or to better account for the company’s business cycle and seasonality.

Flexibility in transition

The Accounting Act stipulates that upon establishment, termination, change of fiscal year start date, or in other cases provided by law, the fiscal year may be shorter or longer than 12 months but cannot exceed 18 months. This provision is intended to facilitate a smooth transition from one fiscal year length to another, offering flexibility regarding the length of the transition period.

Must the decision to change the financial year be made before the period ends?

Although Estonian laws do not have a direct provision prohibiting retrospective changes to the fiscal year, this requirement stems from several accounting and corporate law principles, which have also been affirmed by case law: according to § 13, subsection 3 of the Accounting Act, the fiscal year is generally the calendar year unless otherwise provided by the articles of association. This means that the fiscal year period must be predetermined and valid before or during the respective period. Amendments to the articles of association, including those concerning the fiscal year period, take effect only upon registration in the Business Register. Thus, it is not possible to retrospectively change an already ended period, for which a previous provision in the articles of association was applicable. The financial statement is prepared after the end of the fiscal year. To prepare the report, it must be unequivocally clear which period it covers.

Clear stance of case law – retrospective changes are prohibited

The Circuit Court has repeatedly taken the stance that it is not possible to retrospectively change the length of an already ended fiscal year. Even if a decision to change the fiscal year is made before the report submission deadline but after the actual end of the respective fiscal year, it cannot retrospectively change the ended period. The courts have emphasized that the legal provisions regarding the fiscal year and reporting are established to protect creditors and in the public interest. These norms aim to ensure that entities required to keep accounts cannot arbitrarily set the length of their fiscal year to avoid the obligation of preparing reports and submitting them to the business register. Decisions by shareholders or company members attempting to retrospectively extend or change an already ended fiscal year period are void, as they violate the norms established for the protection of creditors and public interest.