This Key Item increases the likelihood that you will encounter Shiny Pokémon. When you have the item in your bag, then the chances of encountering Shiny Pokémon in the wild is increased to 300% of normal, making it a 1 in 2,730.6 chance. If, however, you're using the Masuda Method to breed, it increased it from 1 in 1,365.3 down to 1 in 1024.
As of Pokémon X & Y, the rate increases from the standard 1 in 4096 to 1 in 1365.3. It is not known if it affects breeding
It should be working on any type of Pokemon you're breeding
The chance is actually 1 in 1024 for this method. It's still a pretty small chance, but it's substantially better. Just keep breeding, and you'll eventually get the Pokemon you want, and keep in mind that results may vary.