US companies including General Motors Corp, Ford Motor Co, Darden Restaurants Inc and Alberto-Culver Co said they may heed billionaire investor Warren Buffett's call to account for stock options as an expense.
Coca-Cola Co and Washington Post Co, both of whom count Buffett as their largest outside investor and a director, this week said they will begin expensing options to make their income statements more accurate and clear. Bank One Corp yesterday said it began the switch with second-quarter results.
Calls by investors to record option costs have been spurred by accounting probes of companies including Enron Corp and WorldCom Inc US rules require only an estimate of option costs in footnotes to income statements. Buffett this weekend said he hoped Coca-Cola's move would prompt other companies to change.
"I have a lot of respect for Mr. Buffett," Alberto-Culver Chief Executive Officer Howard Bernick said in an interview. The company, which makes VO5 shampoo, will review its options policy.
"There will be conversations about this in our boardroom or other boardrooms as well." Advocates, including Federal Reserve Chairman Alan Greenspan and Legg Mason Value Trust fund manager William Miller, say omitting options from income statements obscures a transfer of wealth from shareholders to employees, understates costs and encourages executives to use improper accounting to boost the value of their options.
Option awards soared in the 1990s and "perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising," Greenspan told the Senate Banking Committee yesterday.
Computer-related companies including Microsoft Corp and Oracle Corp, and trade groups such as the American Electronics Association oppose treating options as a compensation cost, saying that their value is unclear and expensing them would reduce profit and make it harder to attract workers.
"To say options are not an expense that should hit earnings is not telling the truth," Buffett said in an interview Sunday.
Bank One, the sixth-largest US bank, said the change will cut 2002 profit by US$28 million, or US$0.02. "Management believes expense recognition is a preferential method of accounting, reflecting that stock options are a form of employee compensation," the Chicago-based bank said in a statement.
Bank One is the fourth company in the Standard & Poor's 500 Index to expense options. The others are Coca-Cola, Boeing Co and Winn-Dixie Stores Inc.
General Motors, the world's largest automaker, is studying the issue, Chief Financial Officer John Devine said on a conference call. "It's very important that credibility in corporate accounting be restored," he said. "We're looking at it very hard." Ford, the No. 2 automaker, is considering expensing options, spokesman David Reuter said. No decision will be made before today's announcement of second-quarter results, he said.
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