How Leap Day Affects Companies’ Financial Reporting

How Leap Day Affects Companies’ Financial Reporting

Every four years, February has an extra day that can make a difference for some companies’ financial reporting. Leap day, which falls on February 29, can affect how companies calculate their revenue, expenses, and earnings per share. Here are some of the key points that companies need to know when accounting for leap day:

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CFOs at some large companies have flagged the effects of leap day in their first-quarter guidance.

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  • Leap day can have a significant impact on companies that recognize revenue or expenses on a daily basis, such as hotels, airlines, and subscription-based businesses. For example, a hotel that charges $100 per night would recognize an extra $100 of revenue on leap day, while a subscription service that charges $10 per month would recognize about 33 cents less of revenue per customer on leap day.
  • Leap day can also affect companies that use the 52-53 week fiscal year, which is common in the retail industry. This method aligns the fiscal year with the same day of the week, such as Saturday, regardless of the calendar year. In some years, leap day can result in an extra week in the fiscal year, which can boost the annual revenue and earnings. However, this also means that the following year will have one less week, which can lower the annual results.
  • Leap day can also influence how companies calculate their earnings per share (EPS), which is a key metric for investors. EPS is calculated by dividing the net income by the weighted average number of shares outstanding during the period. Leap day can affect the denominator of this formula, as some companies issue or repurchase shares on a daily basis. For example, if a company issues 100 shares on leap day, it would increase the weighted average number of shares outstanding by 100/366, rather than 100/365, which would slightly lower the EPS.
  • Leap day can also have tax implications for companies, as some tax rules are based on the number of days in a year or a month. For example, in the U.S., the interest expense limitation under Section 163(j) of the Internal Revenue Code is calculated by multiplying the adjusted taxable income by 30% and dividing by 365 (or 366 in a leap year). This means that the interest expense limitation would be slightly lower in a leap year, which could affect the tax liability of some companies.

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While leap day may seem like a minor detail, it can have a material impact on some companies’ financial reporting. Therefore, companies need to be aware of the accounting and tax implications of leap day and communicate them clearly to their stakeholders.
Jack Hartung, chief financial officer of Chipotle Mexican Grill, in a 2019 photo. PHOTO: LAURA MCDERMOTT/BLOOMBERG NEWS

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Source : The Wall Street Journal

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