Comfort Letter - Explained
What is a Comfort Letter?
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Table of ContentsWhat is a Comfort Letter?How are Comfort Letters Used? Academic Research on Comfort Letter
What is a Comfort Letter?
A comfort letter is a written document that provides a level of assurance that an obligation will ultimately be met. In its traditional context, a comfort letter is given to organizations or persons of interest by external auditors regarding statutory audits, statements, and reports used in a prospectus. The comfort letter will be attached to the preliminary statements as assurance that it will not be materially different from the final version.
How are Comfort Letters Used?
A comfort letter, also known as solvency opinion or letter of comfort is a written assurance that the obligations from an external audit will be met. The letter, given to individuals or organizations, comes attached to the initial statements as a show that it will not differ in content from the final version. Comfort letters are issued to lenders by auditors as assurance that borrowers are in a position to repay loans. Here, the comfort letter is a solvency opinion, not an guarantee, that the borrowers company will remain solvent until the loan is repaid. Underwriters can also be issued with comfort letters before they undertake newly issued securities to mean that investigation into the shares of a company will be done. The comfort letter will seek the match the reports given with GAAP (generally accepted accounting principles) to help the underwriter understand a companys financial data before investing. Parent companies can issue a letter of comfort to a bank or a supplier who wishes to loan or supply its subsidiary company. This also applies in international contracts where a parent company issues a comfort letter on behalf of a subsidiary as an assurance that it will give the subsidiary the needed resources to fulfill a contract. However, the European Union and international law does not require the parent company to take responsibility for obligations incurred by a subsidiary after issuing a letter of comfort. When a parent company issues a letter of comfort for its subsidiary company, there are three terms involved: A confirmation from the parent company that the subsidiary has entered a contract An assurance that the parent company will not break legal links with the subsidiary until all the terms of the contract are met A comfort statement clearly establishing what the parent company will do to support the subsidiary in meeting the terms of the contract. Canada recognizes two types of comfort letter; a letter of awareness in which the parent company confirms that a subsidiary has entered a contract and a letter of comfort in which the parent company shows its intention to offer support to a subsidiary. In the US, letters of comfort are not legally enforced but depending on the wording of the letter, a company may be legally liable based on rule of reliance.