Probably the way they went with it. Of course, had they been smarter, he could have figured out that he, you know, has magic. So once he cuts his hand off, he'll have his magic back, and then can heal his hand/reattach/whatever. Makes a lot more sense in my head, at least, just grow it back once you get your magic.
That's actually what I thought HAD happened at first. And I'm still not sure whether getting the dagger back restored his power or if it was only the power contained in the dagger that he really needed to kill Pan.
Rumple had his usual swagger back, so I'm assuming he got his power restored. But it would have been nice if all that had been explained better.

He knew what was going on, only Emma and Henry have forgotten. They were going to lose THEIR memories either way, so Regina gave them fake ones so that they'd have something and not just be strangers to each other. Actually, without Storybrook memories, Henry would likely just be a vegetable or blank slate, as he'd have NO other memories at all, since birth...