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Stirling Homex

Stirling Homex was under investigation by the SEC for potential inaccuracies in its financial statements. [1] The company reported a 63% increase in revenue over one year despite high levels of unbilled receivables, raising questions about its revenue recognition practices. [2] An analysis found that under IAS 18, Stirling Homex should not have recognized revenue from modular home sales until risks and ownership transferred to buyers, which did not appear to have happened. [3] The SEC was recommended not to rely solely on the company's financial statements and to conduct an independent audit to verify the accuracy of the reported information and determine if corrective action was needed.

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2K views3 pages

Stirling Homex

Stirling Homex was under investigation by the SEC for potential inaccuracies in its financial statements. [1] The company reported a 63% increase in revenue over one year despite high levels of unbilled receivables, raising questions about its revenue recognition practices. [2] An analysis found that under IAS 18, Stirling Homex should not have recognized revenue from modular home sales until risks and ownership transferred to buyers, which did not appear to have happened. [3] The SEC was recommended not to rely solely on the company's financial statements and to conduct an independent audit to verify the accuracy of the reported information and determine if corrective action was needed.

Uploaded by

Anne cutie
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Stirling Homex

1. Case Context -

2. Problem definition

3. Analysis (Analysis ng numbers)

4. Decision

5. Recommendation

Very high receivables and it is risky.

**timeline of events

** issue of revenue recognition. Homex was recognizing revenue from its modular units prior to the
date on which an actual sale had taken place * allocation of profit between divisions, the capitalization
of expenses, and the meaning of 'working capital ' in a specific setting

**Stirling Homex 's sales and resulting accounts receivable were either improperly recorded or fictitious,
and the Consolidated Balance Sheet included in the Annual Reports materially overstated assets by
approximately $36,400,000 as a result of the Inclusion in accounts receivable of sales from projects
improperly recorded in th~ current and prior fiscal year. '

**Turnkey Program: Stirling Homes was still the owner of the modules at the time of their recognition of
revenue.

Stirling Homex retained title and risk of loss until installation was complete and the new owner

could actually claim possession of the project and “turn the key”, thus, in substance StirlingHomex was
still the owner of the modules at the time of their recognition of revenue

there was no mention of the contract of sale being countersigned by Housing and Urban Development.
It is stated that “until Housing and Urban Development countersigned the contract of sale, there was no
legally binding commitment of federal funds
Problem definition

What are the discrepancies in the financial statements of Stirling Homex that caused SEC to investigate
and question the accuracy of the statements and the financial position of the company?

Analysis

- The reported revenue increased from $22.6 million in 1970 to $36.9 million in 1971, this is a
total of 63% increase in total revenue.

- The receivables had increased from 15 M to 36 M in a span of 1 year and a huge percentage of
all the receivables are classified as “unbilled”.
The percentage of the unbilled receivable is high because of Stirling Homex’s timing of revenue
recognition. The sales were recognized when the units were manufactured and assigned to
contracts.

- It is stated that until HUD countersigned the contract of sale, there was no legally binding
commitment of federal funds by HUD. it was never mentioned that the contract of sale was ever
countersigned by HUD.
-
- Based on IAS 18.14: Revenue arising from sale of goods should be recognized when all of the
following criteria have been satisfied:

 The seller has transferred to the buyer the significant risks and rewards of ownership -
Homex was still the owner of the modules at the time of their recognition of revenue.

Reference:

https://www.iasplus.com/en/standards/ias/ias18

Decision & Recommendation

SEC should not solely rely on the financial statements provided by the company. There should be an
independent audit conducted by SEC to make sure that all the information is accurate.

Corrective action should be implemented once it was proven that the Financial Statements of Stirling
Homex was inaccurate.

News article:
https://www.nytimes.com/1975/07/03/archives/us-says-stirling-homex-reported-phantom-
sales-upstate-homebuilder.html
In terms of performance, the company has not billed the *** we saw that the company has
violations

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