Now that the January 31, 2021 deadline for the medical Annual Financial Statement reports (AFS) has passed, we have some additional insight for cannabis business operators in Michigan. The requirement per the AFS’s section 701 of the Medical Marihuana Facilities Licensing Act (MMFLA) has made our jobs more challenging but certainly not impossible.
Even as many licensees missed the deadline, the MRA has continued to accept reports without officially granting extensions. As such, while we believe the MRA understands the challenges, we doubt the grace period will extend for another year.
So far, many licensees have received notices regarding their adult-use licenses. They’ve been told that they will need an AFS by June 30, 2021. As the deadline for these filings grows nearer, we’re listing some of the most common deficiencies we’ve observed from the MRA that demand more clarification and/or action below.
Need assistance with your Annual Financial Statement? Contact us today to learn more about how we can help.
What is the Annual Financial Statement (AFS)?
As outlined in the AFS’s section 701, the MMFLA now requires licensees to submit to the Marijuana Regulatory Agency (MRA) financial statements outlining the licensee’s entire operations per the manner and form outlined by the MRA.
The MRA has developed its annual financial statement form report that licensees must use. The agency will not accept any other report formats. Furthermore, the Annual Financial Statement (AFS) Contact Authorization form will need to be submitted with the AFS.
Here are some links to additional essential resources for filing the Annual Financial Statement in Michigan:
Who Can Prepare the Annual Financial Statement (AFS) Report?
The AFS report must be conducted by an independent certified public accountant (CPA) licensed in Michigan. But does this CPA need to be located in Michigan to prepare the AFS report?
Can an out-of-state CPA firm registered in Michigan prepare the Annual Financial Statement report? Yes, as long as the CPA is licensed in the State of Michigan.
For CPA firms registered in Michigan, the individual CPA handling your report must be licensed in the state. If the CPA is not licensed in Michigan, this person cannot prepare the report on your behalf. This information is under Section 701 of the Medical Marijuana Facilities Licensing Act and MCL 339.722.
Requirements for the Annual Financial Statement (AFS)
Reporting periods and annual requirements are announced by bulletin like the one found here. The bulletin was issued on June 3, 2020, which announced that the Annual Financial Statements requirements for all businesses and individuals with marijuana licenses on or before December 31, 2019 include the following:
- Licenses obtained prior to October 1, 2019 must deport by October 31, 2020. However, the initial licenses acquired from October 1, 2019 to December 31, 2019 should report by January 31, 2021.
- Any marijuana licensee who has acquired a license on or before December 31, 2019 needs to file their report for 2020. This report should include information regarding all licenses held at any point during the applicable reporting period.
- The report outlines an agreed-upon procedures engagement that has to be handled by an independent certified public accountant (CPA).
- CPAs have to communicate all findings using the report structure created and implemented by the MRA designed explicitly for the marijuana industry. License holders are responsible for filing these reports with the MRA – the agency will not accept other reports.
Without compliance with these reporting requirements, licensees operating in the State of Michigan could be opening themselves up to liability. Filing a late report forwards licensee names to the MRA Enforcement Division, which could result in disciplinary action, such as potential license suspension.
Need assistance with your Annual Financial Statement? Contact us today to have a CPA handle your AFS for you.
Common Annual Financial Statement Deficiencies from the MRA
Preparing a Michigan AFS per the MRA’s demands can be challenging. Here’s a list of the most common deficiencies to consider:
- Entities structured with multiple licensees and a centralized corporate management function don’t clearly outline their allocation of expenses with each corresponding license tested.
- Payroll found in the general ledger isn’t reconciled with payroll tax returns.
- Transactions don’t include properly-maintained supporting documentation.
- Customers and vendors recorded in the general ledger don’t use the legal entity names.
- Revenue found in the general ledger was not reconciled with the POS or METRC.
- Individual sales transactions from METRC do not align with the underlying support observed in the general ledger.
- Ownership tables are not aligned with the documents offered to the MRA.
- Lease agreements are matching the information offered to the MRA.
- Initial licensure dates offered were not accurate, which impacted the reporting periods.
Tips to Prepare for Michigan Marijuana Regulatory Agency Financial Report
As we prepare for the next round of adult-use AFS reports, it’s essential to prepare cannabis companies for the testing. This will involve reviewing and reconciling 2020 record keeping.
Here are some tips to ensure you’re prepared for this testing:
- Properly identify your ownership structure and make sure it agrees to all underlying agreements on file with the MRA.
- Maintain the right documentation for your license approval dates.
- Perform wage reconciliation of the 941s to the general ledger quarterly.
- Check all of the supporting documentation for revenue and expense transactions to ensure they’re all properly maintained. Include this as a component of your accounting process and controls.
- Get form W-9 for every vendor and check the information recorded in the general ledger to ensure it includes the full legal entity name vendor. Maintain caregiver numbers and license numbers for all vendors where applicable.
- Reconcile sales to METRC and, if applicable, to the POS, each month. Make sure to document reasons for any discrepancies.
- Check all agreements to ensure they’re appropriately executed by all parties and are documented with the MRA. For revisions, regardless of whether written or verbal, must be documented.
- Check all legal documents, including but not limited to licensing agreements, leases, and other agreements, to ensure they’re all readily available with all transactions in the general ledger properly recorded in accordance with the agreements.
Need an expert CPA to handle your Annual Financial Statement? Contact us today to learn more about how we can help.