The west workspace is usually set up when you create a west workspace using the related action from the Manage West Workspace menu (located under Welcome View > Manage SDKs). This action creates the west manifest file.
Alternatively, a west workspace can be created when you use the nRF Connect: West Init command to initialize the west module. For example, you can do this when you download and open an application that comes with a west manifest file.
If the extension is unable to identify a west workspace as a valid installation of the nRF Connect SDK or Zephyr, the extension presents the SDK as an unidentified SDK.
Note
When you work with a west workspace, you manage the SDK version manually from the west manifest file and you need to update the west workspace to update the SDK version.
The guidelines for configuring the west manifest file are not in scope of this documentation. Refer to the West Manifest section of Zephyr's documentation.