Support letters

NotesPaper exam

When the parent undertaking (or a fellow subsidiary) is able and willing to provide support

Group accounts are prepared on a going concern basis when a group, as a single entity, is considered to be a going concern

So often the parent might have to guarantee this for other subs..

Many banks routinely require a letter of reassurance from a parent company stating that the parent would financially or otherwise support a subsidiary with cashflow or other operational problems

As audit evidence:

  1. Formal confirmation is a ‘comfort letter’ confirming the parent ’s intention to keep the subsidiary in operational existence

  2. This letter of support should normally be approved by a board minute of the parent company

  3. The ability of the parent to support the company should also be confirmed, for example, by examining the group’s cash flow forecast

  4. The period of support may be limited (eg one year) 

    Sufficient other evidence concerning the appropriateness of the going concern assumption must therefore be obtained where a later repayment of material debts is foreseen

  5. The fact of support and the period to which it is restricted should be noted in the Sub's FS

NotesPaper exam