Reference no: EM132643445

Newark Ltd is a manufacturing company that operates a production facility in the Sydney suburb of Blacktown. In January 2020 residents living adjacent to the production facility complained that the ground around their homes was being contaminated by waste discharged from Newark Ltd's production facility. In May 2020, environmental officers from the City of Sydney Council confirmed that the ground was contaminated although they did not regard the contamination as posing a health risk. Although Newark Ltd is not legally required to restore the contaminated ground, Newark Ltd immediately responded by implementing new procedures for the storage and disposal of waste material to prevent any further contamination from occurring and then then made a series of public announcements that it would undertake to restore the contaminated ground in two years' time.

As at 30 June 2020, Newark Ltd estimates the cost of restoring the contaminated ground as follows:

Cost                               Probability
$1,500,000                        5%
900,000                             5%
500,000                             30%
350,000                               60%

On 30 June 2020, the risk-free discount rate, based on two-year government bonds, is 6%. However, Newark Ltd believes that a discount rate of 4% is appropriate to adjust for the risks specific to this liability.

Required

Question 1: Determine the amount that, in your judgement, Newark Ltd should recognise as a provision as at 30 June 2020. Justify the approach that you used to calculate the amount. You should note that the marks for this question are for the approach that you take and the justification rather than the calculation.