Investing in Cannabis: Understanding the Accounting and Disclosures

In October 2018, Canada legalized recreational use of cannabis. One year later, in late 2019, after share prices had fallen significantly from their peak, investors were looking for favourable investment opportunities in the cannabis industry. HEXO Corp. and Aurora Cannabis Inc. were two cannabis companies that traded on the Toronto Stock Exchange and followed International Financial Reporting Standards. In such a young industry, many companies were still reporting losses. Therefore, potential investors focused on a company’s enterprise value (EV) and used the EV-to-revenue multiple as a useful metric for assessing a company’s value. Before conducting an analysis of the two companies’ values, however, investors had to consider several accounting directives issued by the International Accounting Standards that affected their financial statements. In particular, IAS 41 Agriculture posed various difficulties for Canadian cannabis companies. Investors who were interested in pursuing opportunities in Canada’s cannabis industry had to pay close attention to this accounting standard and to the financial statements of individual companies.

This case can be used in an intermediate accounting course at the undergraduate level, a corporate financial reporting course at the undergraduate or graduate level, or in a financial statement analysis course at the undergraduate or graduate level. It can also be used for an expanded discussion about non-GAAP reporting. After completion of this case and assignment questions, students will be able to accomplish the following objectives:<ul><li>Discuss key accounting issues in Canada’s cannabis industry, including fair value accounting under IAS 41 Agriculture and accounting for excise taxes under IFRS 15 Revenue from Contracts with Customers.</li><li>Analyze the strengths and weaknesses of IAS 41 Agriculture as it applies to cannabis production.</li><li>Assess the relative share prices of two specific companies using financial statement ratios from the perspective of an investor.</li><li>Discuss the opportunities and challenges associated with generally accepted accounting principles (GAAP) and non-GAAP reporting in the cannabis industry.</li></ul>

• biological assets, fair value, ratios