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Monday, 31 January 2011

Accounting dollarization

Updated on 2 October 2013

Accounting dollarization is not the same as normal dollarization of an economy. An economy is dollarized when the national functional currency is physically substituted with a relative stable foreign currency, normally the US Dollar. That is how the phrase “dollarization” originated. The national currency is not used anymore. Its legal tender is legally terminated. Dollarization is generally adopted after a period of severe hyperinflation, e.g. in Zimbabwe in 2008.

Accounting dollarization is doing all your daily accounting in US Dollars or in any other relatively stable foreign currency during hyperinflation in your national functional currency in an economy that does not use the US Dollar as functional currency. It does not necessarily mean that you do all your actual business transactions in US Dollars. You normally do some business in US Dollars and some in the local hyperinflationary currency. You may even do no business in US Dollars.

You simply note down the daily parallel US Dollar rate and use it in all your daily business transactions and daily accounting. The existence of a US Dollar foreign exchange rate, official or unofficial, is essential for the application of accounting dollarization. When there is only one US Dollar rate the economy will normally not be in hyperinflation and accounting dollarization will not be required. Sometimes the US Dollar parallel rate changes more than the normal once per day. It can change every 8 hours, for example, during severe hyperinflation.

Accounting dollarization is the same as Capital Maintenance in Units of Constant Purchasing Power as defined in IAS 29 which requires financial capital maintenance in units of constant purchasing power during hyperinflation, but, not at the period-end monthly published CPI, as required in IAS 29, but at the DAILY US Dollar parallel rate.

I implemented it for the first time in Auto-Sueco (Angola), the Volvo agents in Angola, starting in January, 1996. Auto-Sueco (Angola) is the subsidiary of Auto-Sueco in Portugal.

Accounting dollarization is also not the same as the US GAAP requirement that US companies with subsidiaries in hyperinflationary economies simply translate their year-end HCA financial statements prepared in the hyperinflationary local currency into US Dollars at the year-end rate before consolidation into the controlling US company´s consolidated accounts. Accounting dollarization is running any local business in a hyperinflationary economy in US Dollars on a daily basis applying the daily parallel rate. This eliminates the hyper-eroding effect of

(1) the stable measuring unit assumption as implemented under HCA on the real value of all non-monetary items (variable and constant real value non-monetary items) in a hyperinflationary economy as well as the hyper-eroding effect of

(2) hyperinflation on monetary items inflation-indexed daily in terms of the daily US Dollar parallel rate.

Accounting dollarization is a daily price-level accounting model or daily indexation or daily monetary correction applying financial capital maintenance in units of constant purchasing power in terms of a Daily Index as authorized in IFRS in the original Framework (1989), Par. 104 (a), now the Conceptual Framework (2010), Par. 4.59 (a).

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproducation without permission.