Expensing share options could mean more hedging, say analysts

Hedging employee share options could become more common if companies follow Coca-Cola’s example and expense them, according to equity analysts.

“I suspect hedging will increase,” said Guy Ashton, head of equity research at HSBC in London, “but it depends which methodology is used.” At present, companies do not have to expense share options, but this is likely to change due to current market concerns about the accuracy of corporate results - especially in the US. International accounting bodies are currently discussing potential methodologies for expensing employee option schemes and which parts of the balance sheet they will impact.

Coca-Cola said on Monday that it intends to expense the cost of all stock options the company grants beginning in the fourth quarter. “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,” said Doug Daft, Coca-Cola’s chief executive.

Coca-Cola intends to use market quotes from financial institutions to determine the value of its options. The company currently does not hedge its employee stock option plan.

“Our decision to expense the cost of our stock option grants will not change that,” said a spokeswoman for Coca-Cola. “Typically you would enter into a hedging situation to protect against volatility in cashflow, but this accounting decision has no impact on cash flow,” she added.

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