Question Plastics Solutions Ltd operates a manufacturing plant near a vacant block of land owned by the SA state government. As a result of a equipment malfunction in the companys plastics operation in July 20X3, the surrounding land became contaminated. At the date the land was contaminated there was no legal requirement to clean up the land. A lobbying campaign was started in February 20X4 calling for a new environmental law to be imposed by the state Environmental Protection Authority. Accordingly, Plastics Solutions Ltd decided to take proactive steps by introducing a pollution policy and began applying the policy to its activities during the current financial year ending 30 June 20X4. It also started looking at different insurance options for future environmental liabilities. As at 30 June 20X4, it is virtually certain that a draft of the new law requiring a clean-up of the contaminated land will be enacted shortly after the year end. At this stage, the company has no recourse against its insurance company for the clean-up costs. The companys management is prepared to pay around $250,000 in clean-up activities.

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 20X4. 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.