From what i hear all vendors and items within those vendors will update to slightly more powerful versions. I'm not sure if they replace the existing items or simply 'add' the new ones in. As for engrams, i doubt they'll be affected as Bungie would've warned us to use them before the update (as they did with the Cryp update). It would also seem that your current legendary gear (((Won't))) update like the exotics do and you'll have to either buy the newer versions or wait for Bungie to address this issue and offer a 'Legendary Upgrade System' which i could see using MOL (Motes of Light) to upgrade as they have been rendered semi-useless (unless you love buying all the aesthetic crap the Speaker has for sale) after Xur removed the Exotic Engram from his inventory.