What is the measurement basis for hedged items in a fair value hedge?

In a fair value hedge, the measurement basis for hedged items is their fair value. This means that the hedged items are recorded and measured at the price that would be received to sell them in an orderly transaction between market participants at the measurement date. This approach aligns with the objective of a fair value hedge, which is designed to offset the exposure to changes in the fair value of the hedged item due to specific risks, such as interest rate or credit risk.

During the life of the hedge, changes in the fair value of both the hedged item and the hedging instrument are recognized in earnings, which emphasizes the importance of fair value measurement in providing relevant financial information. By using fair value as the measurement basis, companies can effectively manage risks and provide stakeholders with a clearer picture of the entity's financial position and risks associated with the hedged items.

Other measurement bases, like carrying value or cost, do not adequately reflect the current market conditions or risks associated with the assets involved in the hedge, which is why they are not appropriate for hedged items in this context.