The water simulation is completely new code. It flows into neighbor blocks that are marked to allow it, like into air blocks. Water is no longer a block. It is a water voxel, which means the water voxel can be in the same place as a block, so you could have water flowing into and past grass, a fence or a pole block.
The game is not a real water simulator. The new water sim is designed to be performant and work in a basic fashion that makes sense for our game play.