As far as we can tell, if you were in blockstun before the most recent hit contacted your shield, you cannot execute the "parry". This means that things like G&W's turtle, Pikachu's bair, and other multi-hit moves, instead of being very bad on block, will be very good on block since you really won't be able to power shield them (when we see people power shield the first hit of multi-jabs and such, they tend to just get hit for it). Similarly, tight blockstring stuff like landing low lag aerial to tilt won't be parry bait after the last hit since, if we understand the mechanic correctly, you'll only be able to counter the first hit on your shield as long as you remain in blockstun.
That isn't to say that this doesn't seem like a potentially very powerful mechanic, especially for punishing slower single hit moves very hard. Dropping shield to parry like random tilts in the middle of soft pressure could be useful of course and even better is the kind of useful option every character can do (instead of some characters like Robin just having no real options when under shield pressure), but of course, good mix-up will have unpredictable timing anyway and dropping shield at the incorrect time will just get you hit so I anticipate that being overall interesting instead of degenerate. Overall I anticipate this being more useful than power shielding in 4 probably by a pretty significant margin, but I don't think it looks gamebreaking at all.
EDIT: As for shield damage, I believe it works this way. Just like attacks that hit an opponent directly inflict hitlag before hitstun, attacks that hit a shield inflict shieldhitlag before shieldstun (and yes, you can SDI during it in the Smash games that have SDI, though it's rarely useful to do so). Shield damage is applied on the frame you enter shieldstun, and of course, if your shield at any point reaches 0 health, it pops and you die immediately if you're Jigglypuff or shortly thereafter if you're anyone else. The new power shield has been shown to negate shield damage so I suspect the actual timing window is "release the shield input during shieldhitlag" which is actually a very narrow window, but certainly if you were precise with it which strong players will learn to be you could really negate moves like Shield Breaker.
