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. 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. 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.