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High Demand for Cannabis: The Wild West for Financial Professionals

Although many consumers and investors were excited about the Canadian legalization of cannabis in October 2018, the entry of cannabis into the market has been anything but smooth.

While challenges are expected in any new market, the industry has suffered serious growing pains in everything from logistical issues to financial reporting. According to an article in BNN Bloomberg, nearly $1-billion worth of legal cannabis was sold in Canada during the first year of legalization.

While initial sales forecasts were higher and implied that the majority of purchases would be made legally, early Statistics Canada data shows that the non-legal market accounted for 70 to 80 percent of all cannabis sales during the first year of legalization.

The introduction of cannabis into the Canadian market offers new opportunities for some but the resulting financial and regulatory implications can be a nightmare for financial professionals. Financial reporting watchdogs in Ontario, British Columbia, Alberta and Quebec found that 100 percent of 21 licensed cannabis producers (among a group of 70 industry operators reviewed) needed to improve their “fair value and fair value related disclosures.” They found that licensed producers did not provide sufficient information in their financial statements and MD&A for an investor to fully understand their financial performance.

In an article in Maclean’s magazine, forensic accountant Al Rosen says that the financial statements of Canada’s publicly traded licensed producers are a “bloody mess.”

Uncertainties in financial and regulatory reporting are both a curse and a blessing for financial professionals. The lack of experience of many “cannapreneurs” offers numerous opportunities for accountants and bookkeepers to provide financial guidance. To prepare for the growth of the industry, many entrepreneurs need to be designing long term sustainable financial models and strategic plans to enable them to reach their full potential.

Tax and regulatory rules are still evolving and in many ways the industry still reflects a “gold rush” mentality. Cannabis companies will need to develop appropriate tax and accounting structures for both national and international expansion.

Compliance is another evolving area where professional advice can mean the difference between success and failure. Issues surrounding compliance will continue to grow even more as edibles now enter the market.

To explore options involving the application of accounting and auditing standards to cannabis, CPA Canada has created a task force to discuss issues in this new industry.

Faced with increased demand from consumers and investors for more industry information, the organization feels that Canada is in a position to help shape reporting and auditing practices.

One of the key challenges accountants face is that for the first time in Canada, many public companies are required to apply the IFRS (International Financial Reporting Standards) agriculture standard. Although many current agricultural businesses in Canada are private and are not required to apply IFRS, most cannabis companies are public as they had to raise money to begin operations.

The cannabis industry is governed by International Accounting Standard (IAS) 41(Agriculture) which outlines how financial information is disclosed related to agricultural activity. A lack of guidance in how to apply the standard leads to a lack of consistency in practice.

Another issue arising from industry growth includes the financial and operational challenges of doing business outside of Canada. In the U.S., cannabis is illegal at the federal level but legal in some states. It’s not hard to visualize the resulting impact on banking, taxation and other legal issues in considering business with the U.S.

While Canada’s growing cannabis market offers a wealth of opportunities for seasoned and informed financial professionals, there are still numerous challenges including rules that have yet to be written. As the industry evolves and is set to disrupt others, investors will look for companies that adhere to financial and regulatory guidelines forcing others to follow suit. For now, the initial investor frenzy seems to have levelled off as they strive for more informed investment decisions and watch how the industry plays itself out.