Is this how it is implemented on SB1 as well as SB2, or is only SB2 implemented this way?
Both - SB1 is 20-bit and SB2 is 24-bit output. This applies to both the DAC and the S/PDIF outputs.
I would imagine that the format would remain 24-bits, but you may have chosen to converted it to 16-bit words, so that it would be compatible with 16-bit external DAC devices.
We output all the bits. I've never heard of an s/pdif receiver that would barf on more than 16 bits - they'd just ignore the least significant bits, since the data is MSB-justified.
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