Coke to Treat Options as the Real Thing

Management at the Coca-Cola Co. dropped a minor bombshell Sunday when it announced it will expense the cost of all stock options the company grants. The revised accounting treatment will begin with options to be granted in the fourth quarter of the year.

"Management has concluded that stock options are a form of employee compensation expense and therefore it is appropriate that these costs be reflected in our financial results. I am pleased that our company's Board of Directors agrees," said Doug Daft, chairman and chief executive officer. "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 when all compensation costs are recorded in the financial statements."

Expensing options has become one of the lightening rods in the debate over corporate accounting reform. Many critics of President Bush's get-tough speech on July 9 regarding accounting abuses said they were disappointed that the president did not call for the expensing of stock options.

How contentious is the issue of stock option accounting? Indeed, Sen. Carl Levin (D.-Mich.)recently proposed an amendment to the current Senate bill that would create an accounting industry oversight board. Levin's amendment would simply instruct that board, if established, to examine the issue of how company's account for corporate stock options. The amendment does not mandate that corporations treat stock options as expenses. Nonetheless, Levin's amendment has drawn considerable criticism -- particularly from companies in Silicon Valley -- and may not pass.

Hence, it was surprising to see one of the world's largest companies voluntarily choose to take the lead by adopting an options-as-expense policy. Clearly, Coke's move puts pressure on senior executives at virtually every other company to justify why they don't do the same.

"We think the time is right for corporate America to show leadership and integrity in their financials," Coca-Cola Chief Financial Officer Gary Fayard told Reuters. He called the current method of not expensing options as a "loophole."

Coke director Warren Buffett agreed, telling Reuters he thought the company's decision was a "classy move." Buffett added: "It provides numbers in terms of earnings to the shareholders that far more accurately reflect economic reality than the prevailing system in corporate America. It tells the truth to shareholders about what compensation really costs."

Coca-Cola will adopt the fair value based method of recording stock options contained in SFAS No. 123, Accounting for Stock-Based Compensation, which the company management said is considered the preferable accounting method for stock-based employee compensation.

All future employee stock option grants will be expensed over the stock option vesting period based on the fair value at the date the options are granted. "The company expects minimal financial impact in the current year from the adoption of this accounting methodology," it added in a statement.

Coke management estimated if its board of directors grants options in 2002 at a similar level to 2001, the expected impact would be approximately a penny per share for 2002.

Coke said it intends to use quotations from independent financial institutions to determine the fair value of the stock options granted. The option value to be expensed will be based on the average of the quotations received from the financial institutions to buy or sell Coca-Cola shares under the identical terms of the stock options granted.

Now, we'll see if other companies follow Coke's lead.

Report: WorldCom's Problems Started Earlier
Louisiana Republican Rep. Billy Tauzin, chairman of the House Energy and Commerce Committee, said Sunday on ABC's "This Week" that WorldCom's accounting problems actually date back to 2000, one year earlier than the company has admitted to.

Tauzin said that internal documents show that then-CFO Scott Sullivan and several other executives tried to quash complaints from at least two employees about the company's accounting methods. Tauzin says those complaints came as early as April 2000. "The documents ... reveal a strange pattern of people inside the corporation discovering it, trying to do something about it, and ultimately failing until recently," said Tauzin.

According to documents released by Congress, several members of the WorldCom staff, including a member of the company's internal audit staff, reportedly challenged several of CFO Scott Sullivan's accounting practices.

Today's Accounting Scandals
Pretty soon, you'll need a program to keep track of all the bookkeeping scandals -- and bookkeeping scandal rumors -- out there.

Over the weekend, for example:

• Shares of Procter & Gamble Co. closed down about 2.7 percent on Friday due to rumors that the consumer products giant had an accounting problem. "This is strictly a rumor with absolutely no foundation," Clayton Daley, P&G's chief financial officer, said. "We have not been contacted by any authorities whatsoever regarding our accounting practices. In fact, we have been recognized for the clarity of our financial statements by individuals in both the investment and academic communities."
  
  
  

• Duke Energy Corp. and El Paso Corp. Friday reported they received subpoenas for documents from the U.S. Attorney's Office in Houston, as part of a grand jury investigation. Duke said it also received a subpoena from the Commodity Futures Trading Commission.
  
  

These probes are part of the same investigation of trading practices of energy companies that have led prosecutors to seek trading records from Dynegy Inc., Reliant Energy Inc. and CMS Energy Corp.

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