Page 14 - Representation & Warranties Insurance

Description of Typical Representations
and Warranties
The following sections provide further detail of the
representations and warranties typically included in
standard transaction agreements. A practitioner would
most commonly be engaged to assist with the following
representations and warranties:
• Financial statements
– Audited or reviewed
– Materiality
– Interim reporting
– Normal year-end adjustments
• Undisclosed liabilities and contingencies
• Collectibility of receivables
• Inventory
• Internal controls
• Material contracts
• Forecasts and forward-looking statements
• Environmental / product liability / asbestos
• Compliance with laws
• Intellectual property
• Real property and tangible property
• Fundamental representations
• Taxes
• Labor matters / employee benefits
• Business practice / ordinary course
• Solvency
The following contains further description of the
common RWI terms.
10 Representations and Warranties Insurance
Financial Statements
One of the most common and essential accounting-
based representations relates to the financial statements
of the target entity. Representations related to financial
statements are essential components of transaction
agreements because the financial statements report
the financial results of the target entity on which buyers
may rely in determining the purchase price. Depending
on the level of sophistication of the target entity and
the structure of the target entity, the exact nature and
content of financial statement representations may vary.
A typical financial statement representation includes the
following core components:
• Reference to the actual financial statements to which a
party makes a representation (balance sheet, income
statement, statement of cash flows, statement of
shareholder equity, and notes thereto)
• The dates of such financial statements
• An indication whether such financial statements are
for an entire year or an interim portion of the year
• Whether such financial statements were audited or
reviewed
• The accounting basis on which such financial
statements are prepared (U.S. GAAP, IFRS, cash basis,
tax basis, or some other comprehensive basis of
accounting). A reference to the “books and records” as
being an accurate basis for the financial statements
and the consistent historical application of reporting
basis may also provide important descriptions of the
bases on which the financial statements are prepared.