ATLANTA – In the wake of a series of accounting scandals that have prompted widespread demands for greater financial transparency in corporate America, Coca-Cola Co. (KO) announced on Sunday that it would begin expensing the cost of all stock option plans later this year.
The change, which will go into effect in the fourth quarter of 2002, would put the world's No. 1 soft drink maker in the forefront of only a handful of Fortune 500 companies that count stock options as a normal business expense.
U.S. companies currently are permitted to hand out millions of dollars worth of the lucrative corporate perks every year with no detrimental impact on the most common measure of their profitability.
Billionaire investor Warren Buffett, who sits on Coca-Cola's board of directors, called the soft drink maker's accounting change a "classy move" and added that he would feel "far more comfortable" if other companies followed its lead.
"It provides numbers in terms of earnings to the shareholders that far more accurately reflect economic reality than the prevailing system in corporate America," Buffett told Reuters in an interview on Sunday.
"It tells the truth to shareholders about what compensation really costs," Buffett said.
In embracing the new accounting paradigm, Coca-Cola noted that the change would have no impact on cash flow and would only cut earnings in 2002 by about a penny per share if stock options were granted at the same levels as last year.
Prior to Coca-Cola's announcement, analysts had expected the soft drink maker to earn $1.79 per share in 2002, according to research firm Thomson First Call. Coca-Cola is scheduled to report its second-quarter results on Wednesday.
Coca-Cola's sudden move coincides with growing investor fury over the massive accounting irregularities uncovered at now-collapsed energy trader Enron Corp. , telecommunications firm WorldCom Inc. and other companies.
The belief that many more companies may also have hidden expenditures or debt in order to boost earnings has fueled a dramatic sell-off of U.S. stocks and demands for widespread accounting reforms, including the expensing of options.
So far this year, the Wilshire Total Market Index <.TMW>, the broadest index for the U.S. equity market, has plunged about 18 percent and shed more than $2.4 trillion in market value, more than the gross national product of Germany.
A growing list of prominent business leaders, politicians and economists, including U.S. Federal Reserve Chairman Alan Greenspan, now embrace the view that expensing options provides more insight into the true financial health of a company.
But in a speech last week urging corporations to show more responsibility, President Bush rejected calls to force them to take up the practice, seeking instead measures aimed at ensuring shareholders were allowed to vote on all option plans.
Until Coca-Cola's announcement, most major U.S. corporations had also resisted changes to the status quo.
"We think the time is right for corporate America to show leadership and integrity in their financials," said Coca-Cola Chief Financial Officer Gary Fayard, who described the current method of not expensing options as a "loophole."
Fayard added that Coca-Cola's management team believed that expensing options would help ensure that the company's future earnings more clearly reflected the economic realities in its more than 200 markets around the world.
Analysts who follow Coca-Cola said the company's move also could spark others to follow suit.
"Because of Coke's global presence and reputation, it has a power to get other companies to follow along or at least consider this position," said John Sicher, editor of Beverage Digest, a leading industry newsletter.
Coca-Cola plans to expense all future stock option grants based on the fair value at the date options are granted. That value will be determined from stock prices received from financial institutions that trade Coke shares under terms identical to the options.
Coca-Cola normally grants stock options in October.