* Accounting rule caused big swing in bank profits
* Rule change part of broad revamp for bank accounting
* U.S. not completely aligned with international rules
By Dena Aubin
NEW YORK, Feb 14 (Reuters) - U.S. accounting standard setters on Thursday proposed a revamp of a rule that allows banks to record higher profits when the value of their debt deteriorates, a standard criticized by some as confusing and counter-intuitive.
The Financial Accounting Standards Board (FASB) proposal is part of a broad effort to change how banks measure their assets and bring U.S. financial reporting, now different in many ways from that of other countries, closer to international standards.
The proposed rule would end big swings in bank earnings that resulted when the value of their own debt changed.
FASB is seeking comment on the proposal through May 15. It did not give an estimated date for implementation.
Currently, banks can use fair value, or market-based prices, to measure their own debt. Changes in those values get booked in their earnings.
The rule is based on the idea that when a bank's debt becomes less valuable, it can be bought back at a lower price. That reduces a banks' liabilities.
Many investors find the rule confusing. The reason is that it boosts a bank's profits when the value of its bonds weaken because its credit standing has worsened.
"There are a lot of people who did consider it counter-intuitive," said Bruce Pounder, director of professional programs for Loscalzo Associates, a Shrewsbury, New Jersey-based company that provides education for accountants.
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To get a reading of banks' performance, investors and analysts often strip out these "debt value adjustments," which cause big swings in the bottom line. Morgan Stanley, for example, said debt value adjustments were responsible for a $4.4 billion drag on results in 2012.
Under the proposed rule, changes in the value of a bank's debt would not be reflected in profits but in "other comprehensive income." This is a catch-all entry that includes revenue, gains or losses that have not been realized and are not part of the bottom line.
Thursday's proposal also includes changes in the way banks classify and measure an array of assets, a project FASB has been working on for years with international standard setters.
The proposed standard backs away from an earlier draft that would have called for banks to use "fair value," or market-based prices for more of their loans.
Under the new proposal, banks could use either fair value or amortized costs to measure assets, based on cash-flow properties and business models. Most simple loans would be measured at amortized cost, while equity investments would be measured at fair value.
FASB has been working for years with the London-based International Accounting Standards Board (IASB) to try to align U.S. and global rules for financial assets.
"They're still not in complete agreement with each other on the specific proposal that was issued by the FASB today," Pounder said. "It's similar to what IASB believes is the right way to do things but it is certainly not identical."