Ahh, seems like we always get into the "angels dancing on the head of
a pin" discussions... The ways of the FAA are not that mysterious if
you look at the big picture...
It is simulated IFR - this is the key to the whole situation
"simulated"...
The student is PIC of the airplane - being already rated and current
for VFR flight...
The CFII has to be rated - in this case ASEL - to provide instruction
and to act as safety pilot...
The water takeoff is VFR and the student is rated and in command...
During all phases of flight where the CFII is responsible for the safe
operation of the aircraft - during simulated IFR in flight - the
aircraft was ASEL, or could be made ASEL by the student re-taking
command of the flight in VMC if the wheels were in fact retracted - in
either case the CFII was appropriately rated for the instruction
given, which did not include take off or landing...
At some agreed upon point during the simulated circling approach the
IFR training stopped, the PIC assumed command of his aircraft under
VFR conditions at which point the CFII became a simple passenger for
the ensuing water landing...
Doesn't look a bit iffy to me...

Now, the plot thickens... Had this been an actual IMC day, with say a
500 foot ceiling, where the student would have had the aircraft in
visual conditons at the MAP, would this have been legal with this
instructor?
The answer is no...
Because, a filed IFR flight plan where the field is declared by the
controller to be IFR does not become VFR at the moment the pilot can
see the field for the approach and landing, or circling approach to
the waterway... It remains an IFR flight until the airplane has
completed the landing and exited the active runway (or waterway)..
Then and only then is it no longer legally an IFR operation... For
this instruction the CFII would need the amphib rating...
Likewise the takeoff on a declared IFR field would have need the
rating also...

denny