I'm not intimately familiar with the process but this is what I know: ATM operates at Layer 2.
The process is called Segmentation and Reassembly (SAR). The IP packet is broken down into 48-byte
segments. A 5-byte header (which contains the VPI/VCI addressing info) is attached to each segment to create a 53-byte cell. The 53-byte cell is switched to its destination. The destination then
reassembles the packet by removing the 5-byte header from each cell. The SAR encapsulation process is independent and invisible from the upper layers.
There is a great ATM website: http://www.atmforum.com
