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.

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