By Deepa Babington

NEW YORK (Reuters) - Accounting rulemakers plan to consider changing how companies must account for pension income and expenses, as pension assets pummeled by tumbling stock markets burn a hole in corporate pocketbooks.

The Financial Accounting Standards Board, which sets accounting rules in the United States, will discuss whether to improve pension accounting rules in upcoming meetings with its advisory arm, chairman Robert Herz said in an interview.

In recent weeks, pension liabilities have moved up on corporate America's list of woes as the U.S. stock market, which has been on a downward trend for the third straight year, leaves pension plans underfunded and pension costs start biting into earnings.

Overly optimistic assumptions about the returns companies expect to earn from their pension assets, which in turn can soften the blow to earnings, have also begun to draw scrutiny.

The accounting board, in particular, is reaching out to financial statement users such as analysts and fund managers to help decide whether it should add a project on pension accounting to its agenda, which is already crammed with other "hot button" issues, including stock options and bringing U.S. rules in line with international standards.

The Financial Accounting Standards Advisory Council, or FASAC, which acts as a sounding board for FASB on whether to proceed on major accounting issues, will mull pension accounting at its meeting next week, Herz said.

A new advisory council that FASB is forming will also discuss the issue later, he said. That new advisory group will be made up of Wall Street analysts, hedge fund managers and others who spend time reading corporate books.

For his part, Herz makes no bones about how current pension accounting rules in the United States leave much to be desired.

"It is complex, it's somewhat opaque," Herz said, adding that he had received mixed opinions on whether to modify current rules. "I'm not too fond of pension accounting."

The key issue that FASB will have to determine is whether to let companies calculate pension costs with a "smoothing approach" where companies spread pension costs over several years, Herz said. That's because current pension accounting uses a long-term rate of return from the assets rather than relying on actual returns and allows companies to amortize gains and losses on investments.

To be sure, any new rules on pension accounting -- if the accounting board decides to head down that path -- will not be produced anytime soon. The board will not add such a project to its agenda at least until next year, Herz said.

PENSION CRISIS LOOMS LARGE

In recent weeks, several companies, including heavy hitters such as International Business Machines Corp. (NYSE:IBM - news) and General Motors Corp. (NYSE:GM - news) have already said that their pension plans are underfunded.

Earlier this month, Ford Motor Co. (NYSE:F - news) said it expected its U.S. pension plan would be underfunded by about $6.2 billion at the end of the year, since returns on its pension assets fell 11.5 percent through Oct. 31.

At the end of this year, 98 percent of traditional pension funds, which are also known as defined benefit plans, at the 346 Standard & Poor's 500 companies that have such plans are expected to be underfunded, Merrill Lynch estimates.

Many analysts and investors are also concerned about the subjective assumptions on interest rates and expected return that companies use in calculating their pension costs.

For example, companies on average assumed their pension assets would generate returns of 9.15 percent last year -- even though stock market declines have shown no sign of abating, a recent study by consultants Watson Wyatt & Co. showed.