Temporary differences and the application of the recognition exemption

BC74 Applying IFRS 16 Leases, an entity recognises a right-of-use asset (lease asset) and a lease liability at the commencement date of a lease. On initial recognition of the lease asset and lease liability, an entity assesses whether temporary differences arise in determining whether to recognise deferred tax. In making this assessment, an entity determines the tax bases of the lease asset and lease liability by identifying the amounts attributable to them for tax purposes. In some jurisdictions, an entity may receive tax deductions for lease payments when it makes such payments. In such situations, the entity determines whether those tax deductions are attributable to:

(a) the lease asset (and interest expense) - because the deductions relate to the expenses arising from the lease (that is, depreciation and interest expense); or

(b) the lease liability (and interest expense) - because the deductions relate to the repayment of the lease liability and interest expense.

BC75 An entity applies judgement in determining whether tax deductions are attributable to the lease asset or lease liability, having considered the applicable tax law.

BC76 Applying IAS 12, temporary differences arise on initial recognition only when the entity determines that tax deductions are attributable to the lease liability because: