When this option is turned on, students have to get a grade on the activity in order to complete it. For example, a quiz would be marked completed as soon as the user submits it.
It does not matter how well the student did. Getting any grade will mark the activity completed.
It is possible to distinguish between 'pass' and 'fail' grades so that the activity becomes 'completed, passed' or 'completed, not passed' instead of just 'completed'. These results show a different icon and alternative text.
To set this up, you need to specify the pass value for this activity's individual grade:
Once you have done this, anybody submitting the quiz will receive either the pass or fail completion icon. If the quiz can be taken multiple times, the completion icon will automatically update whenever the grade does.
There is one limitation: this only works if grades are immediately visible to students. The grade must be neither permanently hidden, nor hidden until a certain date. If a grade is hidden then only the standard 'completed' state will be displayed - even once the hidden date has passed.