The Flashback option will appear after the player has been to various places, and seen many things. It usually appears after 10-20 days (Sometimes earlier and depends on how the player chooses to explore). The game will take note of what the player has seen.
The Gray Man, if approached, can remove the ability to use flashback mode. Though it's possible to keep the option even after an encounter.
Flashback can also refer to the clips shown during dreams.
In the manual of the game, the function is described as follows:
This roughly translates to:
- "If you select this option, notable scenes you remember up to this point will be replayed."