Pot Sector Gets ‘Audited Hallucinations’ Amid Accounting Quirks

IFRS accounting not rigorous enough as Canada pot firms surge
Statements have ‘absolutely nothing to do with reality’

Marijuana plants grow at a Bonify facility in Winnipeg, Manitoba, Canada, on Wednesday, July 12, 2017. A year before recreational cannabis is expected to become legal in Canada, there's an explosion in companies cultivating the stuff. Some 51 enterprises have gotten the green light to grow pot, and 815 applicants are in the queue.Photographer: Trevor Hagan/Bloomberg

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By Kristine Owram

January 24, 2018 at 5:00 AM UTC

This article is for subscribers only.

Financial statements from marijuana producers can look strikingly rosy, with a quirk of accounting regularly leading to gross margins of more than 100 percent. But a closer look reveals a mishmash of management assumptions that could deflate those margins if the bud sells for less than estimated -- or gets attacked by mold.

In Canada, where 84 listed marijuana stocks have surged to a value of about C$36.9 billion ($29.7 billion) ahead of recreational legalization in July, companies abide by International Financial Reporting Standards. The guidelines favor a fair-value model used by the agricultural industry, which requires companies to place a value on plants while they’re still in the ground.