So base ranks do nothing, while mods from things like items or feats are what grants the AC bonus?
Modified means that it counts your base ranks, plus any bonuses or penalties. So in the case of parry, if you put in 10 ranks but have a -10 penalty from armor and other factors, you won’t get any AC bonus. Alternatively, if you put in 5 ranks - then get a +3 bonus from your dexterity and a +2 bonus from an item while having no penalties, you’ll get 2 AC.
This differs from something like tumble, which uses your unmodified ranks. That means if you put 10 ranks in, you get 2 AC. Penalties won’t hurt you, but bonus items also don’t help in these cases.