The role of emotional assets and liabilities in a firm

The argument for the significant importance of emotional assets and liabilities in adding value to firms is acceptable but has not been widely addressed in the accounting literature. The previous literature on Balanced Scorecard and intellectual capital has attempted to address the issue of monitoring emotional assets and liabilities through non-financial performance measures but have been in a more superficial manner. Previous research has demonstrated that the absence of intangible such as emotional assets and liabilities in traditional financial reports leads to a systematic under-valuation of firms. This has resulted in the production of unrealistic and unrepresentative financial statements. Previous literature agrees that without the inclusion of emotional assets and liabilities financial statements are unable to accurately indicate the economic efficiency of a firm. This paper proposes to add an additional dimension to the current practice of monitoring the assets and liabilities of firms, by supplementing the existing ‘accounting assets and liabilities’ measure with a measure of ‘intellectual assets and liabilities’. This conceptual paper discusses the relationship between these types of assets and liabilities, and examines the way in which emotional assets and liabilities (emotional capital) influence the fair value, profits and cash flow of a firm. This paper defines emotional assets as those assets that activate both intellectual and accounting assets, and emotional liabilities as those assets that de-activate both intellectual and tangible assets. It outlines how the core emotions related to products and services can influence customers in making purchasing decisions that maximize the value of a firm. It also offers indicators for the managing and reporting of emotional assets, and reviews several theories that attempt to explain the relationship between the emotional assets and liabilities, and value of a firm.