During January 2020, the Fair Work Commission1 commenced an investigation into Defiant Ltd for underpayment of wages. The Fair Work Commission is expected to deliver its decision in October 2020. However, Defiant Ltd's lawyers advised that it was likely that the Company would be required to compensate past and present employees for underpayment of wages. Defiant Ltd's financial accountant estimated that the amount involved was in the range of $8,000,000 to $9,000,000. Of this amount, $1,000,000 relates to past employees. The financial accountant thought there might be some difficulty locating some former employees, and did some modelling to calculate the expected value of the cost of paying former employees to be $700,000. The Chief Executive Officer (CEO) thought the matter should be disclosed in the notes to the financial statements for the year ended 30 June 2020. However, the Chief Financial Officer (CFO) was not convinced and has asked you to do some preliminary work on the accounting problem.

Question:

a) Describe an accounting policy to account for the alleged underpayment of wages in the financial statements for the year ended 30 June 2020. Do not justify your policy. Just describe it.