nRF Connect for VS Code v2025.8.654 fails to locate nRF SDK in west workspace

After the update to extension version 2025.8.654, the extension can no longer find the nRF SDK in my west workspace in the build configuration. If I revert to extension v2025.4.106., then the build configure shows nRF Connect SDK v3.1.0 as the SDK as expected.

I am using a west workspace with the following folder structure

ZephyrTemplate/
    - Code/
        - .west/config
        - external/
            - bootloader
            - modules
            - nrf
            - nrfxlib
            - test
            - tools
            - zephyr
        - hw_support/boards
        - applications
            - appA
                - west.yml
                - CMakeLists.txt
                - Kconfig
                - Kconfig.sysbuild
                - prj.conf
                -sysbuild.conf
                - src/
                    - main.c
                - sysbuild/
                    - mcuboot.conf
                    - mcuboot.overlay
            - appB

The appA west.yml looks like this:

manifest:
  self:
    path: Code
  remotes:
    - name: nrf
      url-base: https://github.com/nrfconnect
    - name: ds
      url-base: https://github.com/My-Company/
  projects:
    - name: sdk-nrf
      remote: nrf
      path: nrf
      revision: v3.1.0
      import:
        path-prefix: external
      clone-depth: 1
    - name: MyCompany-ZephyrModules-board_baselines
      remote: ds
      path: hw_support
      revision: v0.1.1
      clone-depth: 1

The .west/config file look like:

[manifest]
path = applications/appA
file = west.yml

[zephyr]
base = external/zephyr

The nRF connect extension is configured to set the board root to ${ZEPHYR_BASE}../../hw_support.

Using the nRF connect extension, I open appA as an existing application and run west update.

When I add the build configuration, instead of finding nRF Connect SDK v3.1.0 in the ZephyrTemplate/external folder, it sets the SDK to 3rd Party v1.0.0.

It is still able to configure and build. However the extension does not recognize that is built successfully and requires a pristine build. When I click the button to do a pristine build, I get the error "Failed to determine build parameters".

Interestingly, if I revert the extension version with the build directory still present, the extension correctly detects the build configuration.

What do I need to do in the v2025.8.654 extension update to get the extension to find the nRF connect SDK in the west workspace?

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