Managerial Risk Accounting is concerned with the generation, dissemination and use of
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...
related
accounting
Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
information to managers within organisations to enable them to judge and shape the risk situation of the organisation according to the objectives of the organisation.
Subject
As a part of the
management accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
system and function, managerial risk accounting has the following two main purposes:
* decision-facilitating or decisions-making
* decision-influencing or stewardship
These purposes are achieved by providing respectively relevant information to improve the ability and willingness of the employees to achieve the organisations’s goals and objectives. For the purpose of decision facilitation, decision makers should be provided with an accounting representation of the state-act-outcome set of the decision. Especially, it is necessary to provide statements concerning the likelihood or probability of states and outcomes. For the purpose of stewardship, it is necessary to provide information on the risks taken and their relation to the risk bearing capability of organisation as well as their relationship to the return generated.
Accounting representation of risk
Existing accounting systems are primarily "monovalent". That is, a single accounting value is attributed to a specific object or purpose. In contrast, risk and uncertainty are formally characterised by a whole range of possible values connected to an object.
*
Financial accounting
Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of Financial statement audit, financial statements available for pu ...
: Risks are mainly represented by the recognition of
Provision (accounting)
In financial accounting under International Financial Reporting Standards (IFRS), a provision is an account that records a present liability of an entity. The recording of the liability in the entity's balance sheet is matched to an appropriat ...
or
Contingent liability
In accounting, contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of an uncertain future event such as the outcome of a pending lawsuit. These liabilities are not recorded in a company's accounts ...
.
Fair value
In accounting, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated with production or replacement, market c ...
measurement partially includes considerations of risk.
Hedge accounting allows for limited aggregation of mutually offsetting risks.
*
Cost accounting
Cost accounting is defined by the Institute of Management Accountants as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includ ...
: Risks in the sense of unexpected resource consumption is accounted for by using normalised costs for those events (expected value).
*
Capital budgeting
Capital budgeting in corporate finance, corporate planning and accounting is an area of capital management that concerns the planning process used to determine whether an organization's long term capital investments such as new machinery, repla ...
: Risk representation ranges from flat adjustments to cash flows and duration via risk adjusted discount rates to decision tree analysis, stochastic simulation and real options.
*
Performance measurement: Risk is usually represented in form of risk adjusted discount rates or hurdle rates.
Special risk accounting techniques do exist but are in practice mostly restricted to financial instruments as accounting objects and financial institutions as accounting subjects. They include:
* At-Risk-Measures such as
value at risk,
Cash Flow at Risk or
Earnings at Risk.
* Risk adjusted performance measures as
RAROC and RARORAC.
In summary, it can be concluded that the representation of risk and uncertainty in accounting systems is limited in scope and technique as well as dispersed over different systems. As of now, no specialised comprehensive accounting system for the purpose of representing risk organisation wide in comparable terms has evolved. Such a system should allow for the representation of risk in accounting terms connected to the goals of the organisation such as liquidity and profitability on different organisational levels such as the organisation as a whole, business units and projects. Central to this is the configuration of adequate
risk measures to capture the risk situation and measures for the capability of the organisation to bear risks (e. g. risk capital). These measures should also take into account behavioural and cognitive aspects of
judgement and
decision making
In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either ra ...
under risk and uncertainty.
See also
*
*
Decision making
In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either ra ...
*
Enterprise risk management
Enterprise risk management (ERM) in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. ERM provides a framework for risk management, which typi ...
*
*
Financial risk management
Financial risk management is the practice of protecting Value (economics), economic value in a business, firm by managing exposure to financial risk - principally credit risk and market risk, with more specific variants as listed aside - as well ...
and esp.
§ Corporate finance
*
Financial risk modeling
* {{slink, Financial modeling#Accounting
*
FP&A
Financial planning and analysis (FP&A), in accounting and business, refers to the various integrated financial planning, planning, financial analysis, analysis, and Financial_modeling#Accounting, modeling activities aimed decision support, at sup ...
*
Hedge accounting
*
Management Accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
*
Risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...
*
Risk Management
Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...
*
Risk measure
*
Uncertainty
Uncertainty or incertitude refers to situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown, and is particularly relevant for decision ...
References
* Chorafas, Dimitris: "RISK ACCOUNTING AND RISK MANAGEMENT FOR ACCOUNTANTS", CIMA PUBLISHING, 2007.
* Collier, Paul/Berry, Anthony/Burke, Gary: "RISK AND MANAGEMENT ACCOUNTING", CIMA PUBLISHING, 2006.
* Institute of Management Accountants: "Statements on Management Accounting - Enterprise Risk and Controls - Enterprise Risk Management: Frameworks, Elements, and Integration", Montvale, NJ, 2006.
* Winter, Peter: "Managerial Risk Accounting and Control - A German Perspective" (August 21, 2007). Available at
SSRN
Management accounting, *
Risk management in business