When estimating fair value, IFRS 13 – Fair Value Measurement (“IFRS 13”) requires companies to maximize the use of relevant observable inputs and minimize the use of unobservable ones1. Given the nascent stage of the cannabis industry in Canada, most inputs used to determine the fair value of biological assets are unobservable, resulting in Level 3 fair value. However, as the industry matures, we expect certain inputs to become observable, which will reduce some of the estimation uncertainty in the fair value measurements.
Conceptually, the value of biological assets provides a notional market seller with a return for cultivation efforts incurred up to the measurement date. The notional market buyer also requires a fair return for purchase, assumed risk, and return for the further development into a finished product.
As such, fair value measurement models often consider:
- Expected yields for dried flower, shake, and trim
- Stage of growth
- Market price of finished goods
- Selling costs
- Cost per gram
- Cost to complete
- Survivorship and wastage
It's expected that the variations in yield and other similar sensitive inputs will be factored into fair value measurement models, and more importantly, disclosed within the notes of the financial statements.
IAS 41 permits departure from fair value when there is an inability to reliably measure it. However, this departure is rarely applicable. In our view, this departure is not applicable within the cannabis industry as there is an ability to make reliable measurements.
Cost may be used as a proxy for fair value when:
- Little biological transformation has taken place; or
- The impact of biological transformation is not expected to be material (particularly, early in the biological transformation lifecycle)
Cannabis plants go through a series of stages as they grow and mature. Moreover, the growth (and fair value) of plants is not linear. Therefore, this poses an interesting question for fair value measurement:
- Is the passage of time a proxy to use as a basis for fair value accretion?
- Or, does the particular stage of the plant development suggest the fair value may exceed its cost?