Explore how cyclical fluctuations in sales and expenses impact quarterly reporting, and learn essential analytical approaches to account for seasonality in interim disclosures.
I remember once chatting with a friend who, back in college, worked part-time at a popular ski resort. She used to say, “Everyone thinks cash just pours in all winter, but come spring, we’re sweeping tumbleweeds.” That’s basically the idea behind seasonality in business. Seasonal factors—like holiday shopping sprees, back-to-school surges, winter tourism, or even something as niche as the fireworks boom around certain holidays—can hugely affect sales cycles, cost structures, and ultimately the financial results that companies report in their interim statements.
While a ski resort might thrive during cold months and go quiet in the off-season, a landscaping service probably sees the opposite. These seasonal patterns (or cyclical ups and downs) create challenges in interpreting a company’s quarterly data. If we don’t factor in timing—and that’s sometimes tricky—then we might misread a firm’s performance by simply comparing one quarter to the immediately preceding one. That is why IFRS 34 (Interim Financial Reporting) and similar US GAAP guidelines encourage companies to disclose seasonality factors. The aim is to provide investors and analysts with context surrounding those big swings in revenue and expenses.
• Seasonal Sales Cycles: The idea that many industries have “peak” and “off-peak” demand. Retailers often see spikes around holidays, while tourism-based businesses cash in during summer or winter breaks.
• Quarterly Earnings Volatility: Rather than a smooth earnings curve across months, these seasonal cycles create bumps on the earnings trajectory. For instance, a toy manufacturer might register most of its sales in the final quarter of the year.
• Interim Reporting Adjustments: Because IFRS 34 and US GAAP require companies to provide updates through interim (quarterly or semiannual) statements, entities must decide how to account for cyclical patterns. Some attempt to “smooth” expenses or adjust the timing of revenue recognition to reflect seasonality better.
• Seasonal Adjustment: It’s a method used to remove or reduce predictable, recurring fluctuations so that underlying trends become more apparent.
A common pitfall is to compare a company’s Q1 performance with its Q4 performance without considering the holiday or year-end effects that might have inflated Q4. That’s why the “like-to-like” approach (comparing the same quarter in different years) is often more revealing. Or, you might look at rolling 12-month results. Comparing 12-month data across multiple years smooths out the single-quarter lumps and dips, like removing the peaks of the ski resort or the valley of the landscaping service.
The IFRS 15 (Revenue from Contracts with Customers) and ASC 606 (US GAAP) frameworks give guidance on when revenue should be recognized. But if your company’s business cycle is highly seasonal, revenues might not arrive in neat monthly increments. Some folks might prorate or defer certain revenues, especially if they relate to multi-month service packages. Others might have bulk shipments that happen only once or twice a year. It’s important to see if management’s revenue recognition choices align with the underlying seasonality.
Seasonal demand can push you to build up significant inventories or ramp up staff for the peak seasons. Then, once the “rush” ends, you might quickly scale back. This leads to large swings in working capital, which in turn affects your operating cash flow. Analysts can’t just assume a company’s operating cash flow in Q2 bears any resemblance to Q1—especially if Q2 is off-season. Keep an eye out for big spikes in Accounts Receivable (AR) or Inventory heading into the busy period, followed by a big jump in Accounts Payable (AP) if vendors need to be paid right after the peak.
Employing rolling averages is a solid trick for seeing the “true” pattern. You might grab data for the trailing 12 months (TTM) at each quarter-end. By overlapping these 12-month periods, you reduce the buzz of short-term fluctuations. Using multi-quarter averages (e.g., a four-quarter rolling sum) can also help you forecast future performance more reliably—particularly in industries where a single quarter is always an outlier.
Here’s a small Python snippet to get a sense of how an analyst might compute a rolling average for monthly sales data:
1import pandas as pd
2
3data = {
4 'Month': pd.date_range('2023-01-01', periods=12, freq='M'),
5 'Sales': [100, 90, 95, 110, 200, 300, 400, 250, 120, 110, 105, 150]
6}
7df = pd.DataFrame(data)
8df['Rolling_3Month_Avg'] = df['Sales'].rolling(window=3).mean()
9df
Even a simple script like this can show how average sales evolve over time, lowering the distraction of short-term changes in one particular month. If you’re analyzing a real business, you’d likely expand this concept with more complex modeling, but the principle is the same.
Under IFRS 34, companies should disclose “seasonal or cyclical factors” that materially affect their financial results. US GAAP also recommends outlining any significant variations caused by seasonality in the quarterly filings (Form 10-Q). These disclosures might come as a dedicated section in the Management Discussion and Analysis (MD&A), highlighting expected and actual seasonal variations in revenue and expenses.
It might be helpful to visualize the typical path an analyst follows when factoring seasonality into interim disclosures:
In Chapter 1.8 of this volume, we discussed segment reporting requirements. For seasonal analysis, it’s not uncommon to find large differences in seasonality among segments within the same firm. A global retailer might have a winter-sports segment in northern countries peaking in one quarter versus a southern hemisphere operation that peaks six months later. Breaking down seasonality by segment can be super insightful, helping you see if each segment’s performance lines up with typical seasonal cycles.
• Overlooking Offsetting Seasonality: If a conglomerate has divisions whose busiest periods differ, the combined company statement might look fairly stable—even though behind the scenes, each division is on a roller coaster.
• Ignoring Inventory Mechanisms: Some businesses ramp up production or supply months ahead of the actual sales season. If you don’t connect the dots, you might misinterpret short-term declines in operating cash flow.
• Blindly Trusting Management’s “Seasonality Explanations”: Yes, managers often have the best vantage point. But you’ll still want to verify disclosures with actual data (like shipping logs, backlog, or historical monthly trends).
Consider a retail chain that sells a huge chunk of merchandise in November and December. For the first three quarters, the firm might report modest profits. Then Q4 is monstrous. If you looked only at Q4 earnings and extrapolated that performance for the entire year, you’d risk an unrealistic forecast. Instead, you’d compare Q4 results to the previous Q4 to see if the spike is bigger or smaller than last year’s holiday spree.
In addition, watch out for instances where the holiday shopping season extends into January (for returns, gift card redemptions, etc.). This can shift part of the revenue recognition or cost responsibilities to the next accounting year.
In the CFA exam context, especially as you progress through different items sets or short-answer questions, you could easily run into a scenario describing a business with dramatic quarterly ups and downs. They may ask you to interpret a table of Q1–Q4 results or to identify the best method for analyzing a seasonal business (rolling 12-month or same-quarter comparisons). Keep these principles in mind:
• Revisit the guidance from IFRS 34 and US GAAP on interim disclosures, focusing on seasonal backgrounds.
• Emphasize year-over-year, periodic matching to slice out differences that are purely due to timing.
• Check for consistent reasonableness of any “smoothing” methods to ensure the company’s approach truly reflects the underlying seasonality.
• IAS 34, Appendix: Offers detailed guidance on recognizing and disclosing seasonal effects in interim statements.
• The Quarterly Journal of Economics: Various academic research papers delve into how seasonal cycles affect reported earnings and stock price movements.
• “Financial Statement Analysis” by Jerald E. Pinto and others: A deeper overview of how to evaluate interim financial reports.
Seasonality in interim disclosures isn’t just an accounting quirk: it reflects the real pulse of the business. By learning to interpret those quarter-by-quarter dips and spikes appropriately, you can unlock clearer insights into a company’s underlying performance. Don’t be lulled into a sense of stability (“everything’s calm, so it must be fine”) or fooled by a short-term upsurge (“wow, earnings soared 300% this quarter—par-tay!”). Instead, gather relevant historical data, look for cyclical patterns, and consistently apply techniques like rolling averages or year-over-year comparisons. It might take a bit of extra time, but the improved accuracy in your analysis is well worth the effort.
Important Notice: FinancialAnalystGuide.com provides supplemental CFA study materials, including mock exams, sample exam questions, and other practice resources to aid your exam preparation. These resources are not affiliated with or endorsed by the CFA Institute. CFA® and Chartered Financial Analyst® are registered trademarks owned exclusively by CFA Institute. Our content is independent, and we do not guarantee exam success. CFA Institute does not endorse, promote, or warrant the accuracy or quality of our products.