Previously, the extension would only look for the nrf and zephyr directories in the root of the West Workspace, then claim that the SDK is invalid if neither can be found.
A common way of tidying up West Workspaces is to place the SDK itself under a subdirectory called dependencies or external, which would break the SDK identification mechanism in the extension.
Now, the extension will use the West modules list to determine the exact path of these directories, allowing you to structure the workspace any way you see fit.