Rationale for initial recognition exception
An entity acquires an asset for €1,000 which it intends to use for five years and then scrap (i.e. the residual value is nil). The tax rate is 40%. Depreciation of the asset is not deductible for tax purposes. On disposal, any capital gain would not be taxable and any capital loss would not be deductible.
Although the asset is non-deductible, its recovery has tax consequences, since it will be recovered out of taxable income of €1,000 on which tax of €400 will be paid. The tax base of the asset it therefore zero, and a temporary difference of €1,000 arises on initial recognition of the asset.