I thought it was pretty obvious that it isn't happening in real time/space. Spoiler The sky is shown changing to appear like cyber space, and Amy is briefly solid again. Plus the aftermath of the explosion that kills the Ancients in that scene is nowhere to be seen afterwards. Not to mention the whole thing is sepia. I don't know if there's a such a more universally understood rule in visual media than "sepia = the past". It's difficult to figure out what or who the Koco are this particular point in the story and I won't spoil that for you. But yeah... The game wasn't trying to hide the fact that it was a memory you were watching. Regarding whether or not they explain it later... Spoiler They don't explicitly explain it with the characters figuring out what that scene was. Rather, they assume you already know and have Sonic say that somehow they're seeing memories of something from a long time ago. Sonic cottoned on pretty quickly so it wasn't supposed to be a big reveal.