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Cannabis Industry & Accounting Practices

The Canadian cannabis market has grown significantly since the federal Cannabis Act came into effect on October 17, 2018, to legalize the cultivation, possession, acquisition and adult recreational consumption. Canada is the first G7 and G20 nation to do so. The distribution and monitoring of cannabis was left to the Provinces. There is a huge global market and Canada is well positioned to lead that market. Medicinal use of cannabis was legalized on July 30, 2001 and is regulated federally by Health Canada. Countries like Germany and Italy allow Canadian producers to supply their medicinal cannabis. Cannabis is completely illegal in Russia and China. Edible cannabis products are not legal for sale in Canada.

The accounting practices for cannabis industry are governed by International Accounting Standards (specifically IAS 41) for Agriculture published in 2000 and the International Financial Reporting Standards (specifically IFRS 13) since 2011, which prescribes the treatment, financial statement presentation and disclosures related to agricultural activity. However, there is a lack of practical guidance for the cannabis growers that are publically traded. Of particular concern is the required fair value adjustment of inventory prior to harvest on the Balance Sheet and associated debit or credit adjustment under Cost of Sales on the Profit & Loss Statement. The current International Standards were originally published for the hog and lumber industries, which have much longer growth cycles than cannabis with established commodity futures that do not exist for cannabis.

For clarification purposes, some cannabis companies that are publicly traded started to insert a gross profit line that does not factor the fair value adjustment ahead of the IFRS-defined gross profit line. It is anticipated that this could become the standard for reporting income in the cannabis industry in Canada and perhaps even the world.

Legalization of cannabis in Canada will have long term impacts on how accounting practices are performed and how public corporations’ incomes are estimated.

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