A primary-of-its-kind research specializing in the marijuana business raises questions on financial reporting and accounting practices within the marijuana business.
The research looks to untangle sure elements of the financial reporting course of “that are fundamentally confusing to a retail investor,” making it exhausting to determine good corporations, stated Michael Miller, co-author and director of finance at White Sheep Corp, a strategic investor in cannabis belongings.
The findings have been introduced to college students lately at Cambridge University’s Judge Business School.
The evaluation shall be launched to the general public after being introduced a second time within the coming weeks.
Alan Jagolinzer, a Cambridge professor of financial accounting, and Steven Looi, White Sheep’s director of origination, have been the opposite co-authors.
The research finally focuses on how the “fair value” of cannabis crops are mirrored in financial statements and the extent of discretion that administration has in dictating what the truthful worth is.
“If you look at the financial statements of some of the publicly traded cannabis companies,” Miller stated, “it is possible to have no revenue whatsoever, no sales, but you can also tell your investors you made millions of dollars in profit over the same period.”
That’s as a result of all Canadian publicly traded corporations should report underneath International Financial Reporting Standards (IFRF), which classifies organic belongings like crops in another way than different belongings.
“It lets you recognize the fair value, less cost, to sell off your biological assets on your income statement before you actually sell them, and that is the heart of the problem,” Miller stated.
That may cause gross margins to soar in extra of 100% as a result of cannabis manufacturing amenities are increasing quickly, thus rising extra organic belongings. And leisure gross sales haven’t began but.
“The issue will be less acute over time as the market matures, but while the cannabis industry is in expansion mode, it’s pretty chaotic,” Miller stated.
“You could fill a room full of cannabis plants, management could decide those plants have a value of millions of dollars, then you could tell investors you made all this money on your income statement just because you’re growing a room full of stuff,” Miller stated, including that these corporations aren’t breaking any guidelines.
Investors ought to pay much less consideration to gross revenue and focus extra on income, he instructed.
Canadian and Australian public corporations adjust to IFRF, however American companies report with US Generally Accepted Accounting Principles, which doesn’t have the identical challenge with “fair value” recognition of organic belongings.
Matt Lamers may be reached at [email protected]
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