Comfort Letter
Encyclopedia
A comfort letter is a document prepared by an accounting
firm assuring the financial soundness or backing of a company. The comfort letter can be issued by a CPA
declaring no indication of false or misleading information in the financial statements and that the company's prospectus
follows GAAP
. This is sometimes used in connection with an initial public offering
. Comfort letters are also sometimes provided by those involved in evaluating a company's assets, for instance, in the case of oil and gas companies, third-party reserve engineering firms.
A comfort letter may also be used as written assurance by a subsidiary
's parent company or bank used to offer 'comfort' to the buyer as to the seller's ability or willingness to perform its obligations. Comfort letters are often used because the seller is unable or unwilling to provide a guarantee on a certain outcome, such as the performance of a security
.
Comfort letters are typically signed prior to the pricing decision or closing date for a given public offering or other transaction, as a part of the due diligence
process. Subsequently, a "bring-down" letter is used to re-verify, as of a later date, that the original comfort letter is still valid.
The legal and accounting circumstances surrounding comfort letters were the subject of a 1975 novel, The Comfort Letter by Arthur R.G. Solmssen
, a Philadelphia lawyer and novelist.
Letter of Comfort (LOU) in finance terminology is a type guarantee provided by one bank to other bank. Letter of Comfort is also used by importers to arrange funds in products like buyers credit. For example, an importer in India may want cheap funds on LIBOR rates, an international bank can provide these funds subject to letter of comfort provided by importer's existing working capital bank, stating that on due date it guarantee the payment for the loan extended to importer.
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...
firm assuring the financial soundness or backing of a company. The comfort letter can be issued by a CPA
Certified Public Accountant
Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
declaring no indication of false or misleading information in the financial statements and that the company's prospectus
Prospectus (finance)
In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements,...
follows GAAP
Gaap
In demonology, Gaap is a mighty Prince and Great President of Hell, commanding sixty-six legions of demons. He is, according to The Lesser Key of Solomon, the king and prince of the southern region of Hell and Earth, and according to the Pseudomonarchia Daemonum the king of the western region and...
. This is sometimes used in connection with an initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
. Comfort letters are also sometimes provided by those involved in evaluating a company's assets, for instance, in the case of oil and gas companies, third-party reserve engineering firms.
A comfort letter may also be used as written assurance by a subsidiary
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
's parent company or bank used to offer 'comfort' to the buyer as to the seller's ability or willingness to perform its obligations. Comfort letters are often used because the seller is unable or unwilling to provide a guarantee on a certain outcome, such as the performance of a security
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
.
Comfort letters are typically signed prior to the pricing decision or closing date for a given public offering or other transaction, as a part of the due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
process. Subsequently, a "bring-down" letter is used to re-verify, as of a later date, that the original comfort letter is still valid.
The legal and accounting circumstances surrounding comfort letters were the subject of a 1975 novel, The Comfort Letter by Arthur R.G. Solmssen
Arthur R.G. Solmssen
Arthur R.G. Solmssen is a lawyer and novelist. He is particularly notable for having blended these skills prior to popularization by such novelists as John Grisham.-History:...
, a Philadelphia lawyer and novelist.
Letter of Comfort (LOU) in finance terminology is a type guarantee provided by one bank to other bank. Letter of Comfort is also used by importers to arrange funds in products like buyers credit. For example, an importer in India may want cheap funds on LIBOR rates, an international bank can provide these funds subject to letter of comfort provided by importer's existing working capital bank, stating that on due date it guarantee the payment for the loan extended to importer.