Managerial Risk Accounting is concerned with the generation, dissemination and use of risk

Risk

Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...

 related accounting 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

Management accounting

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control...

 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: Risks are mainly represented by the recognition of Provision (accounting)
  Provision (accounting)
  In financial accounting, provision is a word that creates an ambiguous account title. In U.S. GAAP, provision means an expense, while in IFRS, International Financial Reporting Standards, it means a liability. So, in the U.S., Provision for Income Taxes means the same thing as Income Tax Expense,...
  
   or Contingent liability. Fair value
  Fair value
  Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
  
   measurement partially includes considerations of risk. Hedge accounting
  Hedge Accounting
  Hedge accounting is an accountancy practice.-Why is hedge accounting necessary?:Many financial institutions and corporate businesses use derivative financial instruments to hedge their exposure to different risks .Accounting for derivative financial instruments under International Accounting...
  
   allows for limited aggregation of mutually offsetting risks.
• Cost accounting
  Cost accounting
  Cost accounting information is designed for managers. Since managers are taking decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations...
  
  : Risks in the sense of unexpected resource consumption is accounted for by using normalised costs for those events (expected value).
• Capital budgeting
  Capital budgeting
  Capital budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing...
  
  : 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
  Performance measurement with a process is the complement to process execution. Based on measured performance, the feedback control loop may be closed. The metrics to assess performance is set according to a determined econometric model...
  
  : 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
  In financial mathematics and financial risk management, Value at Risk is a widely used risk measure of the risk of loss on a specific portfolio of financial assets...
  
  , 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 measure

Risk measure

A Risk measure is used to determine the amount of an asset or set of assets to be kept in reserve. The purpose of this reserve is to make the risks taken by financial institutions, such as banks and insurance companies, acceptable to the regulator...

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

Judgment is the evaluation of evidence in the making of a decision. The term has three distinct uses:* Informal - Opinions expressed as facts....

 and decision making

Decision making

Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...

 under risk and uncertainty.

See also

• Decision making
  Decision making
  Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
  
  
• Enterprise risk management
  Enterprise Risk Management
  Enterprise risk management in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives...
  
  
• Hedge accounting
  Hedge Accounting
  Hedge accounting is an accountancy practice.-Why is hedge accounting necessary?:Many financial institutions and corporate businesses use derivative financial instruments to hedge their exposure to different risks .Accounting for derivative financial instruments under International Accounting...
  
  
• Management Accounting
  Management accounting
  Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control...
  
  
• Risk
  Risk
  Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
  
  
• Risk Management
  Risk management
  Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
  
  
• Risk measure
  Risk measure
  A Risk measure is used to determine the amount of an asset or set of assets to be kept in reserve. The purpose of this reserve is to make the risks taken by financial institutions, such as banks and insurance companies, acceptable to the regulator...
  
  
• Uncertainty
  Uncertainty
  Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...