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.

Also known as "letter of comfort" or "solvency opinion."

BREAKING DOWN 'Comfort Letter'

In other practical uses, comfort letters are often issued by auditors to lenders as solvency opinions on whether a borrower can meet the payment obligations of a loan. They are opinions, not guarantees, that the underlying company will remain solvent.

Comfort letters can also be issued to underwriters as an obligation to carry out "reasonable investigation" into offerings of securities. These letters of comfort will ensure that the reports conform to generally accepted accounting principles (GAAP). This helps the underwriter better understand aspects of the financial data which might not otherwise be reported, such as changes to financial statements and unaudited financial reports.

Yet another broad category of comfort letter application is parent company to subsidiary, whereby a parent company can, for example, issue a letter of comfort on behalf of a subsidiary that needs to borrow from a bank in its locale, or provide a letter to a supplier of a subsidiary that wishes to transact a large purchase order of raw materials.

RELATED TERMS
  1. Bank Confirmation Letter - BCL

    A bank confirmation letter is a letter confirming that a line ...
  2. Letter Of Credit

    A letter of credit is a letter from a bank guaranteeing that ...
  3. Attorney's Letter

    An attorney's letter serves as a verification for information ...
  4. Cover Letter

    A cover letter is submitted with a job application and resume ...
  5. Deficiency Letter

    A deficiency letter is a letter issued by the SEC indicating ...
  6. Letter of Intent - LOI

    A letter of intent (LOI) outlines the terms of a deal and serves ...
Related Articles
  1. Managing Wealth

    Letters of Instruction: Don't leave life without one

    A letter of instruction, or letter of intent, is a simple document that can take the guesswork and headache out of settling your estate.
  2. Investing

    Financial analyst cover letters that get you hired

    Crafting a strong cover letter for an analyst job with these techniques can increase your chances of standing out from the crowd and landing an interview.
  3. Small Business

    Letter of Credit

    A letter of credit is a document from a bank promising to pay the holder a certain amount if the holder fulfills certain obligations. Sellers in commercial transactions often require buyers to ...
  4. Investing

    Identifying Your Investing Comfort Zone

    The key to identifying your investing comfort zone is to find a balance.
  5. Managing Wealth

    Don't Be Without a Letter of Intent

    If you don't have a letter of intent in your desk, write one now. Here's why – and what should be in it.
  6. Financial Advisor

    Key Takeaways From Warren Buffett's Annual Letters To Shareholders

    A simple yet invaluable look into the key themes Warren Buffett repeats in his annual letter to shareholders.
  7. Insights

    Examining A Career As An Auditor

    Stricter government regulations have put auditing professionals in demand.
  8. Investing

    Investing Within Your Risk Tolerance Comfort Zone

    Investing within your risk tolerance comfort zone can keep you from making bad decisions.
  9. Investing

    Manufacturing Giants Back US Tax Reforms

    The nation’s largest aerospace and defense companies sent a letter to congressional leaders backing controversial plans to overhaul the U.S. tax system.
  10. Insights

    Financial Auditor: Career Path & Qualifications

    Learn more about what it takes to become an internal or external financial auditor, and determine whether the profession is right for you.
RELATED FAQS
  1. What's the difference between a bank guarantee and a letter of credit?

    Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction ... Read Answer >>
  2. How legally binding is a letter of intent?

    Find out when a letter of intent (LOI) is binding and non-binding. Understand the role of drafting language, and when an ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center