By default, the extension scans for board definitions in all west projects. It also checks the boards directory in the application or sample source directory.
Additionally, the extension provides the BOARD_ROOT flag to CMake to indicate where to find custom boards. By default, the extension considers all current VS Code workspace folders as board root directories along with any entries in the nrf-connect.boardRoots setting. When you create a custom board with the Create a new board page, the appropriate path is also added to your nrf-connect.boardRoots setting.
The same VS Code workspace folders and nrf-connect.boardRoots entries are used to find custom boards in the Custom list of boards in the Add Build Configuration screen.