There's not much detail on this in BOL. There's a paragraph with an example in the Limitations and Restrictions section of UPDATE.

On the CTE article there's only a mention that a CTE can be followed by an insert, update, delete or merge.

However, the rules are only explained for views. The best explanations on modifying data through CTEs come from blogs (or forums). That's a reason on why this feature is not widely known.