Final answer:
The gain or loss on a Fair Value Hedge is recognized in the income statement. This type of hedge is used to manage the risk of changes in fair value of certain assets, liabilities, or firm commitments. Gains or losses from fair value changes of the derivative are reported in the income statement for the period in which they occur.
Step-by-step explanation:
The gain or loss (G/L) on a Fair Value Hedge is recognized in the income statement. This type of hedge is a derivative financial instrument used to manage exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. In the context of currency hedging described by LibreTexts™, companies may enter into a contract that guarantees an exchange rate in the future to protect against potential adverse movements in currency exchange rates. The purpose of such a hedge is to mitigate risk related to exchange rate fluctuations, ensuring that the company is less affected by such economic variables.
When the fair value of the hedge is assessed, any gains or losses arising from changes in the fair value of the derivative are reported in the income statement for the period in which the changes occur. This is contrasted with a cash flow hedge, where the effective portion of the gain or loss on the hedge is initially reported in other comprehensive income and reclassified into earnings in the period(s) when the hedged transaction affects earnings.