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 the financial wellness or financial backing of a company.
The comfort letter can be given by a Certified Public Accountant declaring no sign of misleading or false information in the financial statements and that the company’s scheme follows the operative accounting standards.
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 an 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 the provision of the stated services. In continuation or where a new service is to be rendered, an original comfort letter is given out.
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 in comparison to the provided financial statement.
An accountant gives a detailed and updated financials and always, comments on the amount that may change or be subjected to a bigger 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 very difficult 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 has given also allows the bank to request for 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 give an affirmation that no failures or errors were made in the time the investigation and letter were being carried out. They provide written evidence that formal research was made 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 on 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 of large goods or merchandise or a loan.
Should in case the credit borrowing facility fails 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 kind of case, the supplier/lender may consider getting into an agreement with the buyer/borrower again.
A CPA can give out a comfort letter for affirming that the financial statement does not show any signs of false or misleading information and that the scheme of the company 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 comfort letter is also given out by a parent company 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 a careful eye will be kept by the parent company on all the transactions as a whole.
Just 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 not able to assure or guarantee a particular outcome.