Final answer:
The change in the time value of a foreign currency option used as a cash flow hedge is recognized in other comprehensive income and accumulated in the equity section of the balance sheet.
Step-by-step explanation:
In accounting for a foreign currency option used as a cash flow hedge of a foreign currency denominated asset or liability, the change in the time value of the option is usually recognized in other comprehensive income (OCI) and accumulated in the equity section of the balance sheet under accumulated other comprehensive income (AOCI). This treatment aligns with hedge accounting guidelines outlined in accounting standards such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). The change in the intrinsic value of the option that is effective for the hedge, however, is recorded in the income statement and offsets the exposure to changes in cash flows of the hedged item attributable to the hedged risk.