IAS 41The impact of this accounting policy is to anticipate profits rather than recording inventory at “the lower of cost or net realisable value” which is the more, but not the only, traditional method. These profits are held in Biological Assets and Inventories. To eliminate the impact of this policy there would be a one off impact.
To keep it simple if you look at CGC’s June 30, 2017 results the weighted average cost is reported as $2.78 per gram but if you divide Dry Cannabis in Inventory of $50,127K by 10,715 kgs you get a carrying value of $4.68 per gram, an increase of $1.90. This amounts to $20,339,000. There are also IAS 41 increases within Oils and Capsules. For example 271kgs of capsules are valued in inventory at $2,873K or $10.60 a gram and we don’t know how much the average cannabis equivalent is in the capsules. We also don’t know how much impact IAS 41 has on the Biological Assets. IMO I estimate that the impact of IAS 41 in total is more than $30m at June 30, 2017. If this was reversed it would have a one off impact and as inventory was sold additional profits would be earned. This is why it is critical that all LPs, in advance of the accounting bodies or exchanges changing the rules, take the initiative and provide the information readers need to compare one company to another and fully understand the IAS 41 impacts on each periods results.
Lion tamers (and management too) can play games with this policy by increasing inventories and hence profits even without a sale. Of course the other side to this is when inventory is sold profits are less. If the reported average sales price of $7.96 is maintained then on sale Dry Cannabis will generate a $3.28 gross margin.
So be cautious of high and or sharply increased inventories.
GLTA