Top 10 reasons why cannabis companies need accounting leadership: Part 1

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As many cannabis companies across the globe prepare for a public offering, or for purchase by a public company, the nascent industry’s accounting challenges are beginning to present themselves in numbers. In this two-part series, we’re taking a look at the biggest ways in which cannabis companies can benefit from accounting leadership.

Although research around the medical benefit of cannabis has been underway since 1964 [1] , the medical Cannabis and legal recreational cannabis markets are still in their infancy. As Canada approaches recreational legalisation this coming October 17, the Zeifmans’ Cannabis Team has been maintaining a steady focus on the industry, and the multitude of accounting challenges that are presenting themselves as an increasing number of cannabis companies prepare for public offerings or other strategic transactions. In this two-part series, we’re going to examine the Top 10 areas where cannabis companies can most benefit from the guidance of accounting advisors.

1. Preparing financial reporting for a possible public offering
While most Canadian private companies use Canadian accounting standards for private enterprises (ASPE), cannabis companies that may wish to go public, or be acquired by a public company are advised to use International Financial Reporting Standards (IFRS) from inception. By doing so, historical financial reporting is less likely to be an impediment to a future strategic transaction.

2. Accounting and financial reporting
Often management of earlier-stage cannabis companies does not have prior experience with accounting. Partnering with an accounting firm knowledgeable in the cannabis space and the needs of such entrepreneurial cannabis companies, can assist in the initial design of accounting systems, and the preparation of financial statements.

3. Designing a viable financial model
Building a company’s financial model is challenging at the best of times, especially without subject matter expertise. Consulting a knowledgeable accountant will enhance the prospects that the developed model will open doors towards the desired goals for the future.

4. Creating an investor deck
Many cannabis companies struggle to compile the needed information that will position their business to secure capital investment. Developing an effective investor deck requires experience and specific knowledge pertaining to early-stage investment.

5. Establishing a corporate structure
Corporate structures need to be built in accordance with a company’s plans for future growth and expansion, and need to be effective for tax purposes with a view to future strategic transactions. Share structure, number of shares to be issued, stock option pools, and the preparation and proper maintenance of the capitalization table are all key to future growth, and should be carefully considered by an accounting professional before being finalized.

In Part Two of this series, we will take a look at the remaining 5 areas where Cannabis companies will benefit from financial expertise. As a founding member of Nexia International’s Cannabis Team, Zeifmans is committed to the growth and development of the cannabis industry in Canada and abroad. For more information on our solutions for cannabis companies, contact a member of Zeifmans’ Cannabis Team – Larry ZeifmanRobert Grunwald or Jennifer Chasson.

[1] The Jerusalem Post, “A Higher Calling: How Israeli Marijuana Research Changed the World”, https://www.jpost.com/Opinion/A-higher-calling-How-Israeli-marijuana-research-changed-the-world-560381