New accounting rules are causing bizarre gyrations on financial statements and giving some companies a bottom-line boost when their credit goes bad.

Radian Group Inc. took a $1.33 billion hit in its first-quarter earnings from the decline in the value of insurancelike products it sold and was liable for. That part is not new.

What's new is, the Philadelphia insurer of mortgages and bonds last week had to take the market's perception of its own creditworthiness into account when valuing the obligations.

Because there are significant doubts Radian will be able to make good on them, it had to report an offsetting $2.06 billion

gain

.

In a miracle of accounting alchemy, as the likelihood of a debt or other obligation being repaid drops, firms that use this method must book a corresponding gain in income. That forced Radian to report first-quarter net income of $195.64 million, up from $113.47 million a year earlier. Radian took pains to point out it had an operating loss of $215.2 million.

C. Robert Quint, Radian's chief financial officer, said the theory behind so-called fair-value accounting was fine, but the reality was not: "No one really understands what's real, what's not real."

The standard-setting Financial Accounting Standards Board for years has been moving toward requiring reporting of financial assets at their fair market value. But the rule suddenly is "drawing more attention because of the volatility" in the credit markets, said Brian Bushee, an associate professor of accounting at the University of Pennsylvania's Wharton School.

For fiscal years starting after last Nov. 15, the rule standardized definitions, set up a three-tier framework for valuing financial assets, and required major disclosures. It also required companies to take their own credit into account when valuing what they owe.

Radian did not go as far as it could have with the new accounting rules. Another new rule lets companies choose whether to report certain assets and liabilities, including debt, at fair value. "We have debt that we're carrying at the amount that we owe as opposed to a fair value that would be lower," Quint said.

By contrast, Luminent Mortgage Capital Inc., a Philadelphia investor in residential-mortgage-related securities that was on the verge of going out of business last year, valued its debt at fair value. Its debt has fallen in value because of doubts that Luminent will repay, so it booked a gain.

But wait: If Luminent's prospects improve under new chief executive officer Zachary H. Pashel, some of that gain would be reversed.

Contact staff writer Harold Brubaker at 215-854-4651 or hbrubaker@phillynews.com.