I think the speedometer is based upon a sensor in the transmission taking a reading off of a gear. I would imagine it is measuring a phase voltage and the voltage amount equals a speed that is then displayed on the indicator.

Reading the BMW TSB about the speedometer issue it did have a note that clearly stated it does not affect the odometer. With that being said, it would be interesting to know how it calculates miles/kilometers, or where the sensor is.

I am sure there is also a bit of secrecy on this because we would not want people to be able to manipulate the actual miles/kilometers driven on a vehicle.