What type of hedge designation is characterized by gains or losses being included in current earnings?

The correct designation characterized by gains or losses being included in current earnings is a fair value hedge. This type of hedge is used to mitigate the risk of changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. The primary focus is on protecting against changes in the fair value of the hedged item due to interest rate fluctuations, foreign currency exchange rates, or other factors.

In a fair value hedge, any changes in the fair value of both the hedging instrument and the hedged item are recognized in earnings. This means that if the fair value of either the hedge or the underlying item changes, the corresponding gains or losses are reflected immediately in the income statement, thereby crystallizing the impact of those changes on reported earnings.

This is different from other types of hedge designations, such as cash flow hedges, where gains and losses are initially recognized in other comprehensive income and only reclassified to earnings when the forecasted transaction occurs. Similarly, foreign currency hedges can take the form of either cash flow or fair value hedges, but the accounting treatment will depend on the specific designation. A net investment hedge typically refers to hedging the net investment in a foreign operation and affects other comprehensive income rather than current earnings.