Spent the best part of 2 days trying to figure out why the composition media system (same probably applies for discovery media system) in a MK7.0 VW Golf was failing to read M3U playlists, with the error "No playable files found".
Tried every combination imaginable of file paths, separators, line endings, and even went as far as writing a script to generate extended m3u data from a plain m3u, but nothing made any difference.
The fix turned out to be very simple: have more than one folder on the SD card with MP3 files in it. The software must have a special case for all MP3 files in one folder that (probably unintentionally) breaks playlists. Even a single mp3 file in a second folder is enough to kick it into life.
Once this fix is in place the M3U support is pretty comprehensive - plain or extended and a variety of line endings and path separators all work fine.