I'm of the mind that all absorption mechanics occur after all other calculations have taken place; that is that PW:S only ever absorbs the amount of damage you'd have taken had PW:S not been in place.
As long as damage reduction effects are applied as % values there is no change in the subsequent overall value no matter in what order they're calculated so long as they're calculated prior to absorption mechanics. As far as I know they're calcuated individually rather than stacking so 15% (Shadowform) 40% (PS) and 40% (Armor) doesn't equal 95% damage reduction but 69.4%.
Example (based on that theory):
1000 base damage - 150 (15% Shadowform) = 850
850 - 340 (40% PS) = 510
510 - 204 (40% Armor) = 306
Total absorbed by PW:S = 306
And yes I'm aware that cos of their place in the talent trees it's not possible to have both Shadowform and PS but this is an example + of course another priest might have cast it on you ;) The only thing I can add to this would be the +healing increase which is added to the absorption value of PW:S (30%) which, if it follows standing healing spells' mechanics, would be calculated based on your +healing at the time PW:S is cast.
Edit: My maths sucked
Edited, May 22nd 2008 3:42am by cococj