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Cannabis, commonly known as marijuana, is currently legal to use for medical purposes in Canada. The upcoming legalisation of recreational cannabis in Canada has created global interest in the Canadian cannabis market.
Since 2001, the use of cannabis for medical purposes has been legal in Canada. In July of 2018, the Canadian Government is expected to legalise the use of recreational cannabis. While the majority of Canadian licensed producers grow their crops domestically, some have begun to look abroad for foreign production opportunities in an effort to reduce costs.
Securities activity
South of the border, many American states have legalised recreational cannabis use, though it remains a schedule I narcotic at the federal level. As a result, American cannabis companies cannot file a prospectus within their own country.
Where some may see this as an impediment to business, Zeifmans has identified this gap as an enormous opportunity for American cannabis companies to enter Canadian markets. Activity in cannabis stocks within Canada has skyrocketed; currently approximately half the trading on the Canadian Securities Exchange involves cannabis-based businesses[1]. Though the 84 listed cannabis stocks in the Canadian market have experienced some price volatility, the volume of IPO’s to date has been impressive, with the total value of the stocks surging to approximately CAD $36.9bn[2].
Accounting concerns
As activity in this market continues to grow, accounting issues have been identified. In Canada, cannabis companies must abide by International Financial Reporting Standards (IFRS), which mandate a fair value model for the agricultural industry. IFRS 41 requires companies to place a fair value on plants while still in the ground. While this is fine for a crop of carrots, it poses problems within the cannabis production industry, where standardized approaches to measuring the fair value of biological assets are not yet established.
Currently, Canada’s provincial securities commissions advise that companies: (i) must have a model in place for their valuation approach; and (ii) disclose the assumptions used underlying the concluded value of biological assets. Although complying with the advice, many companies are struggling to produce meaningful valuations. Even the world’s largest cannabis company, Canadian producer Canopy Growth Corporation, had to file amended financial statements in late 2017[3] to address an immaterial non-cash error in the valuation of its biological assets.
Stay tuned over the coming weeks for more information on this topic. In the meantime, should you have any questions, please contact your Zeifmans advisor or Laurence W. Zeifman, Partner at 416.256.4000 ext: 7707 or LWZ@zeifmans.ca.
[1] CTV News, “TMX Group cracks down on marijuana companies that violate U.S. federal laws”, https://www.ctvnews.ca/business/tmx-group-cracks-down-on-marijuana-companies-that-violate-u-s-federal-laws-1.3634750
[2] Financial Post, “Marijuana sector’s books more like ‘audited hallucinations’ than financial statements, accountants say”, http://business.financialpost.com/investing/pot-sector-gets-audited-hallucinations-amid-accounting-quirks
[3] Stockwatch, “Canopy Growth refiles fiscal 2017 results”, https://www.stockwatch.com/News/Item.aspx?bid=Z-C:WEED-2530334&symbol=WEED®ion=C
