Which of the following best describes a hedged item?

The best description of a hedged item is that it is an asset or liability that is subject to fair value changes and is explicitly designated as being hedged. In the context of hedging, a hedged item typically refers to the specific asset or liability that is vulnerable to the risk being managed, such as variations in cash flows or fluctuations in market value.

When a company designates a hedged item, it is effectively stating that it intends to apply a hedging strategy to mitigate risks associated with that asset or liability. This designation is crucial for accounting purposes, as it allows the company to apply hedge accounting, which impacts how gains and losses from the hedging instrument are reported in the financial statements.

The other options do not accurately encapsulate what a hedged item is. A liability that does not affect cash flow describes a characteristic that may not necessarily relate to hedging. A financial instrument used to offset risk refers to the hedging instrument itself, not the hedged item. Lastly, a future transaction that is not yet confirmed does not fall under the definition of a hedged item, as a hedged item must relate to existing assets or liabilities that are at risk.