Sunday, 24 April 2011

Accounting dollarization

Accounting dollarization is not the same as normal dollarization of an economy. An economy is dollarized when the national monetary unit 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. There is no national currency in use in the economy. Its legal tender is legally terminated. Dollarization is generally adopted after a period of severe hyperinflation, e.g. in Zimbabwe in 2008.
Accounting dollarization as opposed to functional currency dollarization is doing all your daily business operations and accounting in US Dollars or in a any other relatively stable foreign currency during hyperinflation in your national monetary unit in an economy that does not use the US Dollar as a functional currency. It most probably never means that you do all your actual business transaction 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 actual US Dollars.

You simply note down the daily – normally unofficial - parallel US Dollar rate and use it in all your daily accounting and business operations. The existence of a parallel rate is essential for the application of accounting dollarization. When there is only one official US Dollar rate and no parallel 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 Constant Purchasing Power Accounting as defined in IAS 29 which requires financial capital maintenance in units of constant purchasing power during hyperinflation under which all non-monetary items (variable and constant items) are measured in units of constant purchasing power, but, not applying the period-end CPI, as required in IAS 29, but 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 the 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 in all accounting and business operations. This eliminates the hyper-eroding effect of the stable measuring unit assumption only as far as the local hyperinflationary currency is concerned as implemented under HCA on the existing real value of all non-monetary items (variable and constant real value non-monetary items) in a hyperinflationary economy.

    Accounting dollarization is a price-level accounting model applying financial capital maintenance in units of constant purchasing power as originally authorized in IFRS in the Framework (1989), Par 104 (a).

Nicolaas Smith

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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