Say, for example, you have a piece of the standard-issue Malevolent set, the current conquest set. You achieve a rating of 2200, and in order to upgrade your piece to the Elite equivalent, you have to hand in the original piece. It's a straight swap.
And players can now upgrade the standard-issue Malevolent pieces with conquest points, so what Bashiok's saying is that those upgrades will remain in place on the Elite equivalent. The Elite equivalent can, of course, also be upgraded with conquest points. This is only currently relevant for conquest gear changes, as this is the only situation where gear items are used to purchase other gear items. It would not apply to raid finder tokens, as it's the token that is redeemed, rather than the item itself. That is not to say that other applications of this rule will not arise in future, as they have in the past. Wrath heroic raid upgrades used a similar system, and, of course, both Cataclysm legendary weapons. With the minimum item level for upgrades set at 458, these items will not be applicable for the upgrade system.
However, it will be interesting to see if it applies with the Elite conquest weapons. These, unlike the armor, are a substantial upgrade in item level, going from 470 to 490. If the upgrades are passed on with these items, it could result in an even more problematic gear escalation situation than currently exists in PvP.
Mists of Pandaria is here! The level cap has been raised to 90, many players have returned to Azeroth, and pet battles are taking the world by storm. Keep an eye out for all of the latest news, and check out our comprehensive guide to Mists of Pandaria for everything you'll ever need to know.