It detects the ignition pulses that actually occur, and sends the successful ignition event back to the ECU, and also to the dash for the tacho. The ECU can then tell whether the ignition event it just requested was successful.
Because of its location, right at the top of the engine, under the plastic cover, it gets very hot, and hence fails. Thankfully, it's rather cheap part (at time of writing, just
£33 at Viamoto, and very simple to replace - 5 bolts to remove engine cover, 2 bIf olts and an electical connector to replace the IFS itself.
If it's bypassed, then the ECU loses the ability to detect misfires.