The Favicon to which you refer, is somewhat involved in the rather pointless (to users) but important (to multinational companies) browser wars.
In earlier versions of FF, the link to the .ico file needed to be relative before it would work. Now it would seem more or less, that it will work if you just bung the favicon.ico file in the root directory*
IE doesn't play to any agreed rules. Other browsers have varying degrees of correctness** as far as rules are concerned.
* If a Favicon isn't playing ball in your bookmarks - delete it and then re-bookmark it and then re-order the list and then click it again to get the message home! Usually works, but this interweb thing is a bit of a free for all...
** No current browser passes "The ultimate test" (of which there are many (contradiction , I know)) so don't get too worried about it....
Edit: ACF never used a Favicon anyway....
Edit2: Neither does yACF........
Edit3: It's all fairly unimportant anyway. Unless you really care about nice little images in your bookmarks....
Edit 4: Sorry for being so anal!