ASC 830-20-30-2 and ASC 810-10-15-10 indicate that a lack of currency exchangeability can cause reporting entities to evaluate the appropriateness of continuing to consolidate a foreign entity (or continuing to apply the equity method).

We believe a lack of exchangeability alone may not be enough evidence for a reporting entity to conclude that it has incurred a loss of control of a foreign entity. Some countries have implemented strict exchange controls. Other regulations may be enacted in these countries that could serve to decrease the ability of a reporting entity to effectively make key operational decisions in regard to its foreign operations (e.g., determining capital structure, product development, purchasing, production scheduling, product pricing, labor relations). Once a reporting entity concludes that a lack of exchangeability is other than temporary and other government regulations impede the reporting entities ability to effectively operate, then deconsolidation of these operations may be appropriate.

The SEC staff has indicated that the application of US GAAP in this area requires reasonable judgment to determine when foreign exchange restrictions and/or government-imposed controls or uncertainties are so severe that a majority owner no longer controls a subsidiary. In the same way, a restoration of exchangeability or loosening of government-imposed controls may result in the restoration of control and consolidation. The SEC staff also expects consistency in a reporting entity’s judgments around whether it has lost control or regained control of a subsidiary.

The SEC staff has also indicated that, to the extent a majority owner concludes that it no longer has a controlling financial interest in a subsidiary as a result of foreign exchange restrictions and/or government-imposed controls, careful consideration should be given to whether that subsidiary would be considered a variable interest entity upon deconsolidation because power may no longer reside with the equity-at-risk holders. As a result, reporting entities should not only think about clear and appropriate disclosure of the judgments around, and the financial reporting impact of, deconsolidation, but also of the ongoing disclosures for variable interest entities that are not consolidated.

For more information on deconsolidation due to other than temporary lack of exchangeability, please see PwC’s Consolidation guide.