Plastics Solutions Ltd operates a manufacturing plant in a rural South Australia. In July $20$X$4,$ land nearby the plant became contaminated and members of the local community were concerned about for health impacts on themselves and their livestock. In May $20$X$5$ the local community commenced a lawsuit against Plastics Solution Ltd seeking clean$-$up of the site and compensation for the impact on the community. At the date the land was contaminated there was no legal requirement to clean up the land.

Plastics Solutions Ltd denied that the contamination was due to their negligence. They claimed it was the result of an equipment malfunction by another local company who had been transporting toxic waste from their site. In June $20$X$5$ Plastics Solutions Ltd engaged lawyers to defend the accusation. Their lawyers have advised that they have a good case and expects them to be successful in the outcome of the case.

If the company were to be found to be responsible for the contamination the clean$-$up costs and compensation is estimated to be approximately $$1\mathrm{.}5$ million. This amount is considered material for the company.

The matter is expected to be heard by the court in December $20$X$5.$

Required:

Describe the nature of this event and explain how it should be accounted for in the financial statements of Plastics Solutions Ltd for the year ended $30$ June $20$X$5.$ Specify any journal entry$($ies$)$ and$/$or disclosures that may be required.

Your answer must clearly state your position and provide the evidence that you have used to determine that position. The supporting evidence should include adequate explanation and justification of the accounting treatment required and be supported by references from Australian accounting pronouncements $($including paragraph numbers where appropriate$).$ Narrations are not required for any journal entries prepared.