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Insight into Canada’s booming cannabis market
The upcoming legalisation of cannabis for recreational use in Canada has created global interest in the market, as well as raising some accounting challenges.
The use of cannabis for medical purposes has been legal in Canada since 2001. In July 2018, the Canadian Government is expected to also legalise recreational use. There is currently a great deal of discussion around how each province and territory will approach distribution and regulation.
While the majority of licensed Canadian cannabis producers grow their crops domestically, some have begun to look abroad for foreign production opportunities in an effort to reduce electricity, heat and labour costs.
There are currently 84 cannabis stocks listed on the Canadian market. Although they have experienced some price volatility, overall performance post-IPO has been impressive to date. The total value of cannabis stocks has surged to more than CAD$35bn 1. Trading in cannabis-based businesses has skyrocketed, amounting to about half of all trading on the Canadian Securities Exchange 2.
Listed company boom
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 listing prospectus within their own country. The Canadian markets therefore represent a significant opportunity for American cannabis companies.
Accounting concerns
As activity in this market continues to grow, a number of accounting issues have been identified. In Canada, public 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 for the cannabis production industry, where standardised approaches to measuring the fair value of biological assets have not yet been established.
Canada’s provincial securities commissions advise that companies must:
- have a model in place for their valuation approach
- disclose the underlying assumptions used to value biological assets.
Many companies are struggling to produce meaningful valuations. Even Canopy Growth Corporation – a Canadian producer and the world’s largest cannabis company – had to file amended financial statements in late 2017 3 to address an immaterial non-cash error in the valuation of its biological assets.
For more information, contact:
Larry Zeifman
Zeifmans, Toronto, Ontario, Canada
T : +1 416 256 4000 x239
E: LWZ@Zeifmans.ca
W: www.zeifmans.ca
Erez Bahar or Mark Weston
Davidson & Company LLP, Vancouver, BC, Canada
T: +1 604 687 0947
E: ebahar@davidson-co.com
T: +1 604 687 0947
E: mweston@davidson-co.com
W: davidson-co.com
1 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-amidaccounting-quirks
2 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-laws1.3634750
3 Stockwatch, “Canopy Growth refiles fiscal 2017 results,” https://www.stockwatch.com/News/Item.aspx?bid=Z-C:WEED2530334&symbol=WEED®ion=C
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