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Did your balance sheet get high under IFRS?


The market capitalizations of most Canadian cannabis companies have declined since legalization in October 2018. At the end of 2018, the general expectation in the industry seemed to be that production and selling volumes would improve into 2019. 

A year has passed, and the business environment for Canadian cannabis companies post legalization continues to be challenged. It’s time for companies that made acquisition along the way, which resulted in intangible value being recorded on their balance sheets, to get ready to test for impairment under IFRS. Read on to find out if you’re ready.

BDO’s Valuation & Accounting Advisory team has put together a brief overview of impairment testing under IFRS, and a few questions to get cannabis companies thinking about their impairment testing requirements under IFRS.

The basics of IAS 36:

  1. Companies that have goodwill and indefinite life intangibles are required to test their cash generating units (“CGUs”) for impairment at least annually, whether they believe there is an impairment issue or not. Companies are also required to assess whether there are any impairment indicators each reporting date (typically quarterly).
  2. The impairment test date doesn’t necessarily need to be year-end, but a year-end test date tends to be the most common. 
  3. The “recoverable amount” of a CGU is compared to its “carrying amount.” If the recoverable amount is higher, there is no impairment. If it’s lower, there is an impairment. 

If there is an impairment, any reported goodwill is written down first. Recording any remaining impairment is more complicated, but it’s generally proportionate to the book values of the remaining assets in the CGU for which individual values cannot be readily determined. A number of cannabis companies have allocated intangible value to licenses, patient lists, and brands, none of which likely have readily determinable values. Working capital and equipment in greenhouses, on the other hand, may have more readily determinable values.

Examples of impairment triggers

While the below is not an exhaustive list, potential indicators include:

  • A significant decline in share price post acquisition
  • Market capitalization falling below book equity
  • Realized price per gram being below forecast prices at the acquisition date
  • Sales volumes being below forecast volumes at the acquisition date
  • Failing to obtain the appropriate licence(s), or loss of licence(s)

Questions cannabis companies should be able to answer heading into year-end 

  1. Have you determined your company’s CGUs? 
  2. Have you assessed/tested individual assets in the CGU for impairment first?
  3. If you’re using a year-end test date, were there any impairment triggers prior to Q4?
marijuana plants

Impairment testing Q&A

  1. Calculating the recoverable amount

    Q: Do I need to prepare a forecast?

    A: Yes, and it should include capital expenditure and net working capital requirements too.

    Q: How many years should my forecast be?

    A: Typically five years.

    Q: What’s the difference between value in use (“VIU”) and fair value less costs of disposal (“FVLCD”)?

    A: The main difference is FVLCD can incorporate market participant synergies that the current owner of the asset may not be able to realize in its VIU.

    Q: How do I determine the discount rate?

    A: By calculating your weighted average cost of capital, using either a build-up approach or capital asset pricing model.

    Q: Should my cash-flows be pre-tax or post-tax?

    A: Good question—IAS references the use of pre-tax cash flows and pre-tax discount rates, but in practice companies tend to use post-tax cash-flows to avoid the complexities of undertaking a pre-tax analysis.

    Q: Can I include loss carry-forwards in my recoverable amount?

    A: No, the present value of the benefit of utilizing the losses will always be less than the corresponding deferred income tax asset. But I’m not recording a deferred income tax asset for loss carry-forwards? Then it would be inconsistent to use the benefit of the related loss carry-forwards in a recoverable amount determination in an accounting context.

  2. Determining the carrying amount of a CGU

    Q: What’s normally included in a carrying amount of asset determination?

    A: Net working capital, property and equipment used by the operations, and any intangible assets attributable to the CGU.

    Q: Do I include cash or other redundant assets or redundant liabilities in my carrying amount?

    A:Your carrying amount should be “apples to apples” with the recoverable amount. For example, if the carrying amount includes redundant cash, the recoverable amount should also include redundant cash. Keep in mind, when you’re comparing your carrying amount of equity to your market capitalization, market capitalization includes net redundancies, including cash.

    Q: Do I get to deduct my deferred income tax liability from my carrying amount of goodwill?

    A: Deferred income tax considerations are complex and cause confusion in an impairment analysis context. There isn’t a right or wrong way per se, and different accounting firms have adopted different approaches to the topic.


It’s a good idea to start the impairment testing process in advance of your test date, with a view of updating the carrying amount and forecast for any changes to the test date. For example, some companies use September 30th balances as placeholders. 

If there are any impairment triggers in a quarter, don’t forget to assess impairment each reporting date as well.

How BDO can help

BDO’s Valuation & Accounting Advisory team works with Canadian and international cannabis companies in varying stages of development and production, and of varying sizes. Our in-depth knowledge of the cannabis sector, and valuation and accounting expertise, will ensure you get the proactive advice you need to avoid any unexpected impairment surprises. 

To learn more, contact your local BDO office or [email protected]

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The information in this publication is current as of October 31, 2019.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. 

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