Qualcomm Incorporated (QCOM) Message Board

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Technology Stocks : Qualcomm Incorporated (QCOM)

QCOM 176.74

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10:41 AM EST

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To: cfoe who wrote (122014)	7/23/2002 9:19:23 PM
From: Clarksterh	Read Replies (2) of 152472

What happens if the options are under water and expire unexercised. Does the company get to take the expense back as income? Or is the expense only recognized when the options are exercised vs. granted. I guess I am not clear on this. It depends. If, as is currently done in most (all?) pro forma expensing of options, the Black Scholes method is used to value the options at the time of issuance then the possibility of their expiring worthless is already priced in. So there would be no taking money back. But of course there are lot of other ways that people are talking about expensing them. Finally, while expensing options looks like the solution to a problem, I think people ought to try and look into the future and see what problems this solution will create. I guarantee you it will create new problems. I can think of at least one, although I am sure I will think of more that result from this new inherent disconnect between earnings and cash flow: 1) There could be more incentive for companies to manipulate their stock price in ways not beneficial to the market or the individual investors. For instance the fact is that stock options do not effect cash flow except via their tax effect and the potential future effect of their strike price. Companies, especially those with poor cash flows, will be incentivized to maximize the option value in order to minimize their taxes and thus maximize their cash flow. This is bad for obvious reasons. For instance if the options are valued using Black Scholes at the time of issuance then there will be incentive for the company to increase volatility, and this is something that is easy for a company to do and very hard to prove. Bottom line - it is dangerous to disconnect earnings from cash flow (i.e. integral(NPV(earnings-cash flow)) over a long time span is not equal to zero.) since it incentives companies to manipulate earnings to maximize the thing that they really care about - cash flow. Clark

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