- The Washington Times - Monday, July 15, 2002

ATLANTA Coca-Cola Co. will begin treating stock options as employee compensation, a key accounting change that advocates contend offers a fairer assessment of a company's performance.
The gesture by such a major corporation could set the stage for other big companies to follow suit as investors and government officials clamor for greater clarity in U.S. accounting practices.
The world's largest soft-drink maker announced yesterday that, beginning in the fourth quarter, stock options issued to executives and employees will be expensed 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 are granted. They are designed to be an incentive for management performance.
But after the Enron and WorldCom debacles and several other corporate scandals, many observers including Coke's largest individual shareholder, billionaire Warren Buffett, and Federal Reserve Chairman Alan Greenspan 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 by Sen. John McCain, Arizona Republican, to make companies treat options as expenses.
But the voluntary move by Coke might add momentum for the different accounting of stock options, which company officials readily conceded yesterday.
"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 in a statement.
"Other companies will follow suit there should be some expensing of some sort," Theodore Parrish, who manages about $800 million, including 64,400 Coca-Cola shares for G.W. Henssler & Associates, told Bloomberg News.
Mr. 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 [Tuesday] 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.
Last year, Coke's top five officers received 3.72 million stock options, including 1 million shares for Mr. 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 major companies to make the change so far. Real estate investment company AMB Property Corp. on July 8 said it started expensing options.
Mr. Fayard said the change will help Coke better tailor its compensation packages, because there will be no incentive to offer one type of stock option over another. But he acknowledged the company could have made such a move before corporate governance issues began to dominate the news.
"It is truly a new environment, and I think this is one of the roles hopefully we can play in helping to restore confidence in financial reporting," Mr. Fayard said.
If such options were treated as an expense, they could weigh on earnings affecting profitability and stock performance.
The beverage giant expects a financial effect of a penny per share this year against earnings, increasing to 3 cents in 2003 and ultimately to 9 cents per share.
Coke's net income in 2001 would have been 5.1 percent less, $3.77 billion instead of $3.97 billion, had options been expensed, according to the company's annual report.

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