"1 year with possibility of extension" - what does this mean?
I'd probably read it this way: 


  I have funding for one year for sure, and hopefully for additional years, but it might depend on the success of future grant proposals, so I can't make any promises.  But assuming that my funding is successful, and the postdoc is continuing to do a good job, I'd be happy to keep them for 2-3 years.


In some cases, postdocs might be funded by "hard money" coming from within the university; this is common in math, and such positions often have names like "Famous Person Assistant Professor".  In this case, funding can be assumed to continue (barring a financial catastrophe for the university) and it means more like "2-3 years assuming you do a good job".