Reporting in the cannabis sector: new issues for a new industry

For the first time in Canada there are many public companies that are required to apply the IFRS agriculture standard (Getty Images/Bloomberg Creative Photos)

As one of the first nations in the world to legalize cannabis for recreational and medicinal use—the Federal Cannabis Act came into effect on October 17, 2018—Canada has become a leader in this new industry. And with growing demands from investors and other stakeholders for more information from the cannabis sector, the country is in a position to help shape reporting and auditing practices. [See Current state of the cannabis industry, nine months after legalization]

Earlier this year, CPA Canada created a task force to explore different reporting and auditing challenges that CPAs working in this sector face. The group, facilitated by CPA Canada, includes participants from several audit firms and the Canadian Accounting Standards Board (AcSB).

We spoke with Michael Massoud, a principal in the research, guidance and support department at CPA Canada, as well as two task force members: Maruf Raza, a partner and national director of public companies for MNP LLP, and Armand Capisciolto, a national accounting standards partner at BDO Canada. Raza has worked extensively with companies in the cannabis sector, nationally and internationally—whether it be assisting with auditing, securing financing or securing initial public offerings (IPOs). Capisciolto, meanwhile, is a member of BDO’s global IFRS team and vice-chair of the AcSB. 

CPA CANADA: What is the task force’s mandate?

MICHAEL MASSOUD: We have three main goals:

1) Maintain a forum for firms and practitioners to meet and discuss financial reporting and auditing issues in the sector.
2) Raise awareness of new issues arising from the application of accounting and auditing standards in the cannabis sector.
3) Where appropriate, develop and publish non-authoritative guidance about identified issues. This includes a webinar to take place in the fall. 

The idea, then, is to bring experts together every two to three months so that we can highlight the issues and talk about how to reduce diversity in practice and increase transparency for users of financial statements. 

ARMAND CAPISCIOLTO: Since some members and staff of the AcSB are also on the task force, this helps the AcSB to become more aware of stakeholder concerns so it can potentially also raise issues with the International Accounting Standards Board. This leads to issue awareness at both the national and international levels.

CPA Canada: What are some of the accounting challenges practitioners face?

MARUF RAZA: The cannabis industry is governed by International Accounting Standard (IAS) 41, Agriculture, which prescribes the treatment, financial statement presentation and disclosures related to agricultural activity. However, there is a lack of practical guidance on how to apply the standard, and this leads to a lack of consistency in practice.

AC: Not only is cannabis a new industry; there are very few public companies that are applying IAS 41 in Canada. Although we have close to 200,000 agricultural businesses here—a large number by any standard—most of them are private and are not required to apply IFRS. Most cannabis companies are public because they needed to raise money. The industry is quite capital intensive—much of the crop is grown indoors and requires lighting and hydration systems. As it turned out, the public market had a massive appetite for getting into this growing industry. 

So, for the first time in Canada we have many public companies that are required to apply the IFRS agriculture standard. I joke with people that growing cannabis is not much different than growing tomatoes. But the average tomato farmer is not a public company that has to report under IFRS.

Can you give us an example of an issue that might arise?   

MR: Under IAS 41, producers must account for their biological assets at fair value, which results in income being recognized prior to sale, while the cannabis plants are growing. A lot of estimations are involved, producing significant measurement uncertainty on the balance sheet and income statement. This makes it difficult for investors and analysts to analyze performance.

CPA CANADA: In the U.S., cannabis is illegal federally but legal in some states. What issues does this raise for U.S. companies looking to list in Canada? 

MR: There are many operational challenges with operating in the U.S., including banking, taxation issues with 280E and the actual listing process itself. The TMX group won’t accept listings for U.S. cannabis companies that are plant touching (i.e., that deal directly with the plant) and this has limited the ability of TSX or TSXV listed companies to reach into the U.S. However, the Canadian Securities Exchange has taken a leadership position in this area by permitting U.S. cannabis companies to list, with appropriate risk disclosures.   

In addition to U.S. companies coming to Canada, several Canadian companies have looked to expand into the U.S. market, and this has led to challenges with their public listings (if on the TSX or TSXV) and restricted their ability to access U.S. listings on the NASDAQ or NYSE. The threat of non-compliance with federal law is more pressing for Canadians who may not always have the same protection under specific state laws as U.S. citizens do.

CPA CANADA: Do similar issues arise with other countries?

AC: Yes, every country has different regulations in terms of who can own and operate there, so agreements can become very complicated.

MR: The biggest challenge from an audit perspective, especially when dealing with other countries, is establishing the legal framework for cannabis in each country, and ensuring the company is in compliance with all laws within that framework. Each country requires an initial time investment from an audit firm perspective under the local rules and ensuring that any licences are in good standing.

AC: The number of jurisdictions that have legalized cannabis for either medical or recreational purposes is growing every day. And since the Canadian capital market is the most mature market for this sector, it is attracting companies from all over the world. 

MR: Yes, and Canadian companies are also going out into the world. So, there are risks on both sides. 

CANNABIS IN CANADA 

Want to learn more about key business and reporting opportunities and challenges in the cannabis sector? Attend CPA Canada’s webinar on September 26, 2019, to learn about the current state of the industry and some of the related accounting implications.