The Citypass includes a 3 day hopper, and it's value, as far as the AP office is concerned, is about the same (possibly exactly the same but I prefer to hedge on it, LOL) as a pre-purchased 3 day hopper.
So you would take either one of those (3 day bought separately or 3 day from the citypass packet) and when you were ready to upgrade, go to the AP office (in
Disneyland, on the right, after you pass under the train tracks). They will charge you the difference between teh AP you want to get (and are eligible for) and the value of those tickets. The AP will be dated as of the first day you used the hoppers (so if you used them on Monday the whatever, that's when your AP will expire the next year, even if you upgraded on Wednesday the whatever+2). They'll get your info, take your money, take your pictures, and you'll have APs!
If your'e staying offsite, the 3 day hoppers will have a day of Magic Morning on them, so you'll want to use that before upgrading, b/c once you upgrade the MM is gone. If your'e staying ONsite, you get MMs through the hotel, so you don't have to worry about the MM on your ticket.
It's really simple, when you're doing it. They upgrade from hoppers all day long and even if the guest doesn't know what they are doing, the CMs do.