Which of the following is NOT the permitted hedge relationships identified by FASB?

Question

Options

• Ahedges of fair value exposures
• Bhedges of formal inception
• Chedges of cash flow exposures
• Dhedges of foreign currency exposures

• A
  5% (2)
• B
  84% (31)
• C
  8% (3)
• D
  3% (1)

Explanation

Option B is the correct answer because "hedges of formal inception" is not a real FASB designation - it is fabricated terminology that does not appear in ASC 815 (Derivatives and Hedging), which governs hedge accounting under U.S. GAAP. The three permitted hedge relationships under FASB are fair value hedges (A), which protect against changes in the fair value of a recognized asset or liability; cash flow hedges (C), which protect against variability in future cash flows; and foreign currency hedges (D), which address exchange rate risk on foreign-denominated items. All three distractors (A, C, D) are legitimate FASB hedge categories and therefore are not the correct answer to a "NOT permitted" question.

Memory tip: Remember the three valid hedges as "FaCF-FX" - Fair value, Cash Flow, and Foreign currency eXposures. Anything outside this trio - like the nonsensical "formal inception" - is the odd one out.

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