Comfort letter


Comfort letter

A comfort letter is a document prepared by an accounting firm assuring the financial soundness or backing of a company.[1] 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.[2] 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.[3]

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.[citation needed]

The legal and accounting circumstances surrounding comfort letters were the subject of a 1975 novel,[4] 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.[citation needed]

See also

References

  1. ^ Random House (2005). Random House Webster's Unabridged Dictionary. Random House Reference. ISBN 0375426051. 
  2. ^ Scott, David L. (1998). Wall Street Words. Houghton Mifflin. ISBN 0395437474. 
  3. ^ Practical Law Company Comfort Letter Retrieved on July 27, 2007
  4. ^ Reissued 2002 and described as follows: "This gripping novel about a Philadelphia lawyer's troubles with his biggest corporate client, and the accountants, has been recommended reading for law students. It explains the stories behind the headlines; whenever a big business deal closes, the outside accountants must give written 'comfort,' by assuring everybody that nothing very bad has happened since the financial statements were published." Arthur R.G. Solmssen, Alumni Notes, The Pennsylvania Gazette, November-December 2003; www.upenn.edu

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