Human Capital & Careers

Qualcomm Endorses Options Derivative

''It's a great idea that has the potential to bring some integrity to the valuation process,'' says chief financial officer William Keitel.
Stephen TaubMay 19, 2005

Cisco Systems Inc. is galvanizing support for its revolutionary proposal to create a market value for its employee stock options, which could reduce the impact on earnings when those options must be expensed.

The San Diego Union-Tribune reported that Qualcomm Inc. chief financial officer William Keitel endorsed the idea, saying, “It’s a great idea that has the potential to bring some integrity to the valuation process.” The company reportedly added that if it had expensed employee options last quarter, its earnings would have dropped 13 percent.

Last week James Schneider, chief financial officer of Dell Inc., called Cisco’s proposal “an interesting idea” and added that it’s something his company will be watching. William Donaldson, chairman of the Securities and Exchange Commission stated that Cisco’s request has “a lot of potential.” SEC chief accountant Donald Nicolaisen supports creating a market to value options, and according to Bloomberg, Nicolaisen and chief economist Chester S. Spatt are studying the new security.

The Financial Accounting Standards Board requires most public companies to begin expensing options as of their first fiscal year that begins after June 15.

Keitel likes the Cisco proposal, according to the Union Tribune, “because I’m concerned that the valuation methodologies that have been put forth by FASB are very theoretical. The range of values that you can come up with while trying to apply that theory is very broad.”

Qualcomm’s finance chief reportedly added that “Black-Scholes is a well-established valuation technique that has been designed for short-term derivatives that are transferable and hedgeable.” However, he also observed that employee stock options are long-term derivatives that are neither transferable nor hedgeable.