Kellogg Company in its 2004 Annual Report in Note 1—Accounting Policies made the comment on page 853 about its accounting for employee stock options and other stock-based compensation. This was the annual report issued the year before the FASB mandated expensing stock options.

(a) Briefly discuss how Kellogg’s financial statements will be affected by the adoption of the new standard.

(b) Some companies argued that the recognition provisions of the standard are not needed, because the computation of earnings per share takes into account dilutive securities such as stock options. Do you agree? Explain, using the Kellogg disclosure provided above.