Hoselaw Ltd. (Hoselaw) is a privately owned manufacturing company in eastern Ontario. The company is owned by five shareholders, three of whom aren't active in the management of the business. The company has a large demand loan outstanding at the bank.

The government recently informed Hoselaw's management that seepage from a dumpsite on its property might have polluted the groundwater used by a local community. The company has denied responsibility but the community has launched a $2,000,000 lawsuit against Hoselaw to compensate it for additional costs of obtaining fresh water and for cleaning up the contamination. The lawyers for the community and the company have met to discuss possible settlement terms, but little progress has been reported. Hoselaw's net income over the last five years has averaged $725,000, and its assets, as reported on the most recent balance sheet, have a carrying amount of $3,750,000.

Required:

Prepare a report to Hoselaw's president discussing the issues surrounding how to account for the environmental incident and the lawsuit. Your report should include a discussion of the alternative accounting treatments available and the implications of each.