KEEP-WELL AGREEMENTS Definition

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KEEP-WELL AGREEMENTS, also known as comfort letters, are documents from one party written to another party in regards to contingent liability. Comfort letters have been held by courts to be legally enforceable commitments if they meet certain standards criteria of language. Comfort letters meeting these standards are loss contingencies in that they are construed to guarantee a financial commitment and must be reported under Statement of Financial Accounting Standard 5 as a guarantee. Auditors should review the language of all comfort letters and seek to discover contingent liabilities not disclosed in financial statements in situations where comfort letters exist. Sources of information concerning the contingent liabilities of comfort letters include: management and third parties. Auditors should document within the client representations letter management assurances that loss contingencies have been reported.

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SHIP IN PLACE is sales billed to customers prior to delivery and held by the seller (also: "bill and hold" or "bill in place" sales).

CAPITALIZATION OF MAINTAINABLE EARNINGS is a valuation method; perhaps the most generally accepted method that involves capitalizing the future maintainable earnings by the application of a suitably chosen capitalization rate or multiple. The definition of earnings may be profit after tax ("PAT") or earnings before interest and tax ("EBIT"). This methodology, which in reality is a surrogate for the discounted cash flow method, requires consideration of several factors, including: a. an estimate of future maintainable earnings having regard to historical operating results and forecasts of future earnings; b. determination of an appropriate capitalization rate which will reflect the risks inherent in the business including sensitivity to industry risk factors, growth prospects, the general economic outlook and alternative investment opportunities; and c. a separate assessment of any surplus or unrelated assets and liabilities which are not essential to the continuing earning capacity of the business operations.

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