Kellogg Company in its 2004 Annual Report in Note 1—Accounting Policies made the following comment about its accounting for employee stock options and other stock-based compensation.

Instructions

(a) Briefly discuss how Kellogg’s financial statements will be affected by the adoption of SFAS No. 123(R).

(b) Some companies argued that the recognition provisions of SEAS No. 123(R) 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.