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July 16, 2002
Coke Changes Accounting of Stock Options
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Coca-Cola Co. has announced that it will begin treating future stock option grants as employee compensation, exactly what critics of corporate accounting have been demanding of all companies.

The gesture by such a prominent member of the business community could set the stage for other major companies to follow suit as investors and government officials clamor for greater transparency in U.S. accounting practices, according to the Associated Press.

Advocates of the change made by Coke say it gives a fairer assessment of a company's performance.

Coke announced Sunday that, beginning in the fourth quarter, stock options will be expensed over the period in which they mature, or vest, based on the value on the day they are granted.

As the AP notes, stock options allow their owners to buy company shares at the price at which they were granted. They're meant to serve as an incentive for management performance. But after the Enron debacle and several other corporate scandals, many observers, including Coke's largest individual shareholder, billionaire Warren Buffett, argued that options have induced executives to doctor financial reports as a way to fuel their share prices.

Accounting for stock options has gained attention in Congress, where the Senate on Thursday defeated a proposal to make companies treat options as expenses.
But the voluntary move by Coke might lend additional momentum for the different accounting of stock options, which company officials readily conceded Sunday.

"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," Coke chairman and chief executive Douglas Daft said Sunday in a statement.

Daft initiated the change after notifying Coke's board members, chief financial officer Gary Fayard said.

"It was really Doug taking President Bush's call (last week) to heart for corporate America and corporate leaders to step up to the plate," he said.
Coke's 2002 options plan authorizes up to 120 million shares that can be granted, or 4.8 percent of the company's outstanding shares.

To read the Associated Press article, via the Washington Post, click here.

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