In key change, Coca-Cola Co. to treat stock options as compensation, list them as an expense
Monday, July 15th 2002, 12:00 am
By: News On 6
ATLANTA (AP) _ Coca-Cola Co. will begin treating future stock option grants as employee compensation, a key accounting change that advocates contend offers a fairer assessment of a company's performance.
The gesture by such a prominent member of the business community could prompt changes by other major companies as investors and government officials clamor for greater transparency in U.S. accounting practices.
Coke announced Sunday that, beginning in the fourth quarter, stock options will be listed as expenses over the period in which they mature, or vest, based on the value on the day they are granted.
Stock options allow their owner to buy company shares at the price at which they were granted and are designed to be a management incentive.
But many observers _ including Coke's largest individual shareholder, billionaire Warren Buffett _ argued that options have induced executives to doctor financial reports to fuel their share prices. Enron executives earned tens of millions of dollars by cashing in their options before the energy trader's stock plunged.
``I think accounting generally, in recent years, has deteriorated and it's done so with the help of management,'' Buffett said in a telephone interview Sunday. ``But I think a big corrective move is under way.''
The issue has gained attention in Congress, where the Senate on Thursday defeated a proposal to make companies treat options as expenses. Coke officials agreed their voluntary move might lend momentum for the change.
``Our management's determination to change to the preferred method of accounting for employee stock options ensures that our earnings will more clearly reflect economic reality,'' Coke chairman and chief executive Douglas Daft said in a statement.
Last year, Coke's top five officers received 3.72 million stock options, including 1 million shares for Daft. About 8,200 of Coke's 38,000 employees received options in 2001.
The change makes Coca-Cola one of the largest companies to count stock options as a compensatory expense.
Florida-based grocery chain Winn-Dixie Stores Inc. and aerospace giant Boeing Co. are the only other major companies to make the change, Coke officials said.
``I think you'll see more companies do it. I know of a couple more companies that are going to do it,'' Buffett said, declining to reveal them.
``I think corporate America's decided they better level with owners,'' said Buffett, who owns 8 percent of the beverage maker through Berkshire Hathaway Inc. ``And any form of attempting to play with the numbers, or to record profits that don't exist, or revenues that don't exist, is just not going to sit well with investors.''
Treating options as an expense could weigh on earnings. Coke expects a financial impact of a penny per share this year against earnings, increasing to 3 cents in 2003, chief financial officer Gary Fayard said.