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Technology Stocks : Qualcomm Incorporated (QCOM)
QCOM 171.51+0.4%3:59 PM EST
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To: Art Bechhoefer who wrote (121759)7/18/2002 5:33:57 PM
From: kech  Read Replies (2) of 152472
 
Art - I have been reading up on this at the following Link.
cei.org

To paraphrase it indicates that the usual case is that companies issue options that are not "in the money". In your example, the stock should be more like 25 when an option is granted to buy at 30. In this case, for financial accounting, firms may choose the "intrinsic" or the "fair value" method (explained on p. 11). Almost all firms use "intrinsic" and under this the option is expensed as zero since its strike price is higher than the current market value. However, what is interesting is that for tax purposes, the company is able to expense the difference between the strike price and the stock price when exercised as an expense, and the employee pays income tax on this same amount. If the employee then holds the stock and sells it after a year, there is then a capital gain paid on the difference between his basis (the former strike price) and whatever the new stock price is.
The "fair value" method is the Black Scholes method and the article explains why most firms avoid using it.

The key point here is that firms do different things for "financial accounting/reporting " purposes than they do for "tax reporting" purposes.
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