A comfort letter is a letter written down by the auditor to an underwriter of securities, which shows an opinion about whether the audited financial statements and schedules in the registration statement adhere as to form with applicable accounting demands of the SEC Act of 1933 and the associated regulations and rules adopted by the SEC.
Procedures carried out are specified by the underwriter.
A comfort letter is known as a document made by an accounting firm that assures a company’s financial wellness or financial backing.
A Certified Public Accountant can give a comfort letter declaring no sign of misleading or false information in the financial statements. The company’s scheme follows the operative accounting standards.
A CPA can give out a comfort letter affirming that the financial statement does not show any signs of false or misleading information and that the scheme follows GAAP.
A comfort letter is sometimes used for specific public offerings. This is also occasionally offered by the people who are responsible for the evaluation of the assets of the company.
Usually, a parent company gives a comfort letter to its subsidiary as a written-down assurance to stand for it if and when any financial complications come up.
This letter does not mean that the wanting of the loan is authorized or is in good order and that the parent company will keep a careful eye on all the transactions as a whole.
Before the closing date for a specific public offering, pricing decision, or any other transaction, those comfort letters are signed.
These documents are normally issued when the seller is not willing or cannot assure or guarantee a particular outcome.
Characteristics and the features of a Comfort Letter
A comfort letter should be shown in a manner that no unplanned legal formalities and unimportant risks are joined and that all those statements created by the bank or organization should not be invalid and bear relevant opinions and facts.
It should not generate unplanned tax liabilities; it should always consist of a disclaimer, a full-detailed credit service user, and a credit service outline.
Furthermore, the comfort letter should consist of a statement of awareness from that bank issuing the credit to testify their understanding of all the set-out obligations.
The comfort letter should indicate the services they intend to achieve. With that, the person issuing should not show that the letter is given as a condition precedent, but it should be given as a credit facility to be issued.
Another characteristic is that the comfort letter does not consist of an expiry date though it expires after providing the stated services. An original comfort letter is given out in continuation or where a new service is to be rendered.
A holding statement is another important item to be considered in a comfort letter. The holding statement should be as at the period of issuance of the letter.
Types of Comfort Letters:
Comforts letters exist in several types, such as:
1. The Accountant’s Comfort Letter
The accountant provides a relevant financial statement and confirms that the borrower is consistent financially compared to the provided financial statement.
An accountant gives detailed and updated financials and always comments on the amount that may change or be subjected to a higher level of professional service.
2. Comfort Letter of a Company
The company giving out the comfort letter may feel it difficult at times to accept the obligation. It is complicated for minor businesses to issue assurances.
Guarantees or assurances are important in the backup, and their services are aborted after the expiry date of the agreed period.
This expiry period also allows the bank to request its debt repayment, and if it is not yet paid, the bank requires payment from the guarantee.
When a company assures the debts or obligations of a subsidiary’s foreign business, there is a likely future change of taxes of the parent company.
3. Underwriter’s Comfort Letter
An underwriter makes sure that the information in the letter of comfort is on the right track. With the help of an underwriter, liabilities to be paid by the insurer from misstatements and financial omission can be shunned.
They affirm that no failures or errors were made when the investigation and letter were being carried out. They provide written evidence that formal research was done and the information given out is accurate.
4. Bank Comfort Letter (BCL)
A Bank Comfort Letter is regarded as a document issued by the bank for its client(buyer) to the supplier to guarantee the supplier of the financial capability and legality of the client or buyer in maintaining a stable trade.
It is essential to note that the Bank’s comfort letter does not declare payment, but it assures the seller of the consistency of the buyer to fulfill their promise in doing business.
Commercial Banks usually issue the BCL to the supplier as a declaration of the ability of the client or buyer, and it is joined by a signed Purchase Order or a Sales and Buying Agreement.
A Bank comfort letter makes a guarantee from their client (borrower) to the lender in buying large goods or merchandise or a loan.
Should the credit borrowing facility fail to offer a Bank comfort letter for their client in the initial stage of buying the merchandise/mortgage, the supplier/lender will see the incapability of the buyer/borrower to meet all the financial demands.
In that case, the supplier/lender may consider getting into an agreement with the buyer/borrower again.