Actually, the version is much more important than this. The code you've cited is actually only a small part of what assume_migrated_upto_version does. The real effect of the migration version is that all prior migrations (as found in the db/migrate directory) are assumed to have been run. (So yes, it does what the function name suggests.)
This has some interesting implications, particularly in the case where multiple people commit new migrations at the same time.
If you version your schema.rb, which is what the Rails team recommends, you're okay. You're 100% guaranteed to have a conflict (the schema version), and the committing/merging user has to resolve it, by merging their changes and setting the :version to the highest of the two. Hopefully they do this merge correctly.
Some projects choose to avoid this continual conflict issue by keeping the schema.rb out of version control. They might rely solely on migrations, or keep a separate version-controlled copy of the schema that they occasionally update.
The problem occurs if someone creates a migration with a timestamp prior to your schema.rb's :version. If you db:migrate, you'll apply their migration, your schema.rb will be updated (but retain the same, higher :version), and everything is fine. But if you should happen to db:schema:load (or db:reset) instead, you'll not only be missing their migration, but assume_migrated_upto_version will mark their migration as having been applied.
The best solution at this point is probably to require that users re-timestamp their migrations to the time of their merge.
Ideally, I would prefer if schema.rb actually contained a list of applied migration numbers rather than an assume-up-to-here :version. But I doubt this will happen -- the Rails team seems to believe the problem is adequately solved by checking in the schema.rb file.