The Banncorp: A Test for Post-Enron GAAP

Abstract

The purpose of this paper is to review a late 2014 non-consolidation decision of The Bancorp (NASDAQ:TBBK), a Philadelphia area bank with a diversified loan portfolio, but also known for being one of largest issuers of reloadable prepaid debit and gift cards in the country.Based on detail presented below, we conclude that either that The Bancorp is not in compliance with Post-Enron GAAP and or that it has been so watered down as to weaken the effectiveness of the Dodd-Frank Act in ensuring that banks are well capitalized.Generally accepted accounting principles (GAAP) relating to consolidation of subsidiaries have changed dramatically in response to the Enron scandal of the late 90s. Pre-Enron, GAAP for consolidation was specified in ARB No. 51. Post-Enron in 2003, the Financial Accounting Standards Board (FASB) issued FIN 46 - an interpretation ARB No. 51. The simple majority interest rule was complete scraped. Instead, FASB said that an enterprise must consolidate a variable interest entity (VIE) ― variable shares of equity and debt ― when it had a controlling financial interest as defined quantitatively​ by the obligation to absorb the major share of losses or the right to receive the major share of benefits.In 2009, FASB amended FIN 46(R) to take into account the valid criticism from lenders to VIEs who had to consolidate because they had a majority financial interest but absolute no power to direct the activities that affected the financials.This amendment ― FASB 46(R) - Statement 167 ― added a qualitative​ stipulation that a corporation must consolidate a VIE if it had most of the power to direct the activities as well as a majority interest in the resulting financial gains and losses.Majority financial interest can be determined quantitatively and has been relatively easy to evaluate for compliance. But, as PwC lamented in a bulletin, the qualitative question of who has the most decision-making power “will require considerable judgment.”