Cannabis companies traded publicly in Canada may appear more profitable than they actually are due to corporate income reporting standards that differ from U.S. markets, The Motley Fool reports.
Cannabis stocks have recently been turning heads with unexpected early profits. Some companies have already reported profits this year, despite the fact that seeing profitability so early in the development of a new market is unusual. Some people see it as a sign that the “Green Rush” is officially underway — the early profitability claims, however, may be misleading.
Companies traded publicly in Canada are required to report income using International Financial Reporting Standards (IFRS). Under these rules, cannabis is considered an agricultural product, and agricultural products are measured by the fair value of the crop, minus any selling costs, before it is actually sold. This means that cannabis producers are basically just guessing at future income — it’s not guaranteed.
The placement of this already questionable asset relative to a company’s bottom line marks yet another quirk to IFRS that has resulted in profitability miscommunications. Canadian agricultural companies — including cannabis producers — are allowed to place their approximate asset either above or below their bottom line. Canadian publicly-traded cannabis companies have chosen to place the before-harvest value of their crop above the line, which reduces the cost of sales in the early stages of reporting, leading to the false appearance of overall year-over-year profitability.
Cannabis investors should understand the nature of IFRS reporting and should study closely any company they might buy stock, particularly once armed with that knowledge. Cannabis was legalized federally throughout Canada yesterday, which is expected to help these companies become more profitable in the future, but it will take some time.