Preheat your oven to 170ºC (340ºF) and line two 8-inch round baking pans with parchment paper.

Blend unsweetened shredded coconut in a food processor until finely ground. Sift coconut with all-purpose flour, baking powder, baking soda, and salt into a mixing bowl.

In a large mixing bowl, beat room-temperature butter and granulated sugar using an electric mixer on medium speed for about 3 minutes until light and fluffy.

Add eggs gradually to the butter and sugar mixture, mixing until the batter is smooth and well combined.

Gradually add half of the dry mixture to the wet ingredients, then stir in sour cream, full-fat coconut milk, vegetable oil, vanilla extract, and coconut extract until combined.

Fold in the remaining dry ingredients gently, pour the batter into prepared pans, and smooth the tops.

Bake for 20-23 minutes or until a cake tester comes out clean, then allow to cool for 10 minutes before transferring to a wire rack.

In a medium bowl, cream together room-temperature butter and full-fat cream cheese until smooth. Add vanilla extract and a tablespoon of coconut milk, mixing until combined.

Gradually mix in powdered sugar until desired sweetness and consistency is achieved, beating until fully combined and fluffy.

Once cake layers are completely cooled, place one layer on a serving plate, spread cream cheese frosting, then add the second layer and frost the top and sides. Decorate with toasted coconut flakes.