World Library  
Flag as Inappropriate
Email this Article

Managerial risk accounting

Article Id: WHEBN0016931178
Reproduction Date:

Title: Managerial risk accounting  
Author: World Heritage Encyclopedia
Language: English
Subject: Management accounting, Risk measure, Risk management
Collection: Management Accounting
Publisher: World Heritage Encyclopedia

Managerial risk accounting

Managerial Risk Accounting is concerned with the generation, dissemination and use of risk 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 1
  • Accounting representation of risk 2
  • See also 3
  • References 4


As a part of the management accounting 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) or Contingent liability. Fair value measurement partially includes considerations of risk. Hedge accounting allows for limited aggregation of mutually offsetting risks.
  • Cost accounting: Risks in the sense of unexpected resource consumption is accounted for by using normalised costs for those events (expected value).
  • Capital budgeting: 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 judgement and decision making under risk and uncertainty.

See also


  • 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: [1].
This article was sourced from Creative Commons Attribution-ShareAlike License; additional terms may apply. World Heritage Encyclopedia content is assembled from numerous content providers, Open Access Publishing, and in compliance with The Fair Access to Science and Technology Research Act (FASTR), Wikimedia Foundation, Inc., Public Library of Science, The Encyclopedia of Life, Open Book Publishers (OBP), PubMed, U.S. National Library of Medicine, National Center for Biotechnology Information, U.S. National Library of Medicine, National Institutes of Health (NIH), U.S. Department of Health & Human Services, and, which sources content from all federal, state, local, tribal, and territorial government publication portals (.gov, .mil, .edu). Funding for and content contributors is made possible from the U.S. Congress, E-Government Act of 2002.
Crowd sourced content that is contributed to World Heritage Encyclopedia is peer reviewed and edited by our editorial staff to ensure quality scholarly research articles.
By using this site, you agree to the Terms of Use and Privacy Policy. World Heritage Encyclopedia™ is a registered trademark of the World Public Library Association, a non-profit organization.

Copyright © World Library Foundation. All rights reserved. eBooks from Project Gutenberg are sponsored by the World Library Foundation,
a 501c(4) Member's Support Non-Profit Organization, and is NOT affiliated with any governmental agency or department.