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 environme ...
related
accounting
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
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 the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, s ...
: 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 and in most schools of economic thought, 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 wi ...
measurement partially includes considerations of risk.
Hedge accounting
Hedge accounting is an accountancy practice, the aim of which is to provide an offset to the mark-to-market movement of the derivative in the profit and loss account.
There are two types of hedge recognized. For a fair value hedge, the offset ...
allows for limited aggregation of mutually offsetting risks.
*
Cost accounting
Cost accounting is defined 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 includes methods for recognizing, classifying, al ...
: 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 is the planning process used to determine whether an organization's long term capital investments such as new machinery, replacement of machinery, new plants, new products, and research development project ...
: 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
Performance measurement is the process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component.
Definitions of performance measurement tend to be predicated upon an ...
: 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
Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by ...
,
Cash Flow at Risk or
.
* Risk adjusted performance measures as
RAROC
Risk-adjusted return on capital (RAROC) is a risk-based profitability measurement framework for analysing risk-adjusted financial performance and providing a consistent view of profitability across businesses. The concept was developed by Bankers ...
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 measure
In financial mathematics, a risk measure is used to determine the amount of an asset or set of assets (traditionally currency) to be kept in reserve. The purpose of this reserve is to make the risks taken by financial institutions, such as banks ...
s 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
Judgement (or US spelling judgment) is also known as ''adjudication'', which means the evaluation of evidence to make a decision. Judgement is also the ability to make considered decisions. The term has at least five distinct uses. Aristotle s ...
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 rati ...
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 rati ...
*
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 typic ...
*
Financial risk management
Financial risk management is the practice of protecting economic value in a firm by using financial instruments to manage exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as liste ...
and esp.
§ Corporate finance
*
Financial risk modeling Financial risk modeling is the use of formal mathematical and econometric techniques to measure, monitor and control the market risk, credit risk, and operational risk on a firm's balance sheet, on a bank's trading book, or re a fund manager's por ...
* {{slink, Financial modeling#Accounting
*
FP&A
A financial analyst is a professional, undertaking financial analysis for external or internal clients as a core feature of the job.
The role may specifically be titled securities analyst, research analyst, equity analyst, investment analyst, ...
*
Hedge accounting
Hedge accounting is an accountancy practice, the aim of which is to provide an offset to the mark-to-market movement of the derivative in the profit and loss account.
There are two types of hedge recognized. For a fair value hedge, the offset ...
*
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 environme ...
*
Risk Management
*
Risk measure
In financial mathematics, a risk measure is used to determine the amount of an asset or set of assets (traditionally currency) to be kept in reserve. The purpose of this reserve is to make the risks taken by financial institutions, such as banks ...
*
Uncertainty
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable or ...
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
The Social Science Research Network (SSRN) is a repository for preprints devoted to the rapid dissemination of scholarly research in the social sciences, humanities, life sciences, and health sciences, among others. Elsevier bought SSRN from So ...
Management accounting, *
Risk management in business