This is a topic that's intrigued me for years. My view is that there's always some embellishment to a 'true story' for the purposes of adding more intrigue/suspense/entertainment - and generally more so the closer it is to the mainstream - it's just a matter of degree. When it strays too far off well-known events someone familiar with those real events will balk at a film and tune out, while someone unfamiliar is more likely to accept things, and enjoy it (everything else being equal). Ignorance is bliss, as they say - and Hollywood is all too aware of this.
Having seen a truckload of films my philosophy now is, 'don't bother me with that based on a true story nonsense, because at this point it's meaningless'. I try to take every film as a work of fiction whether it's supposed to be or not, and work from there. I believe if you can do that you're apt to enjoy the average film more, so the less you know about any real events surrounding a films subject matter the better. As a general rule if you want to know what really happened regarding some event that took place in real life then you should watch a documentary or read a book/article or whatever about it, and not a dramatic film. There are exceptions to every rule though.
Take Oliver Stone's JFK. That's a tier 10 film for me, even though I know that the veracity of a lot of the claims he makes in the film are....questionable. However, everything about that film from a technical standpoint is phenomenal, so it would be a shame to let the fact that some liberties with the truth have been taken spoil my enjoyment of it. I just assume it's only a movie - one guy (Oliver Stone's) take on things that happened when he wasn't around to witness them first hand.
The really good films find a way to stay truthful to reality while taking small liberties with the details in order to provide more drama, and doing so within the framework of their own design and the facts of the events as a whole. While I didn't care much for Frost/Nixon that was mostly due to factors other than its verisimilitude - I'm not familiar enough with the facts surrounding the event to know exactly how it all went in real life. I think it would have bugged me though if, like philamental I had found out the extent to which they'd jimmied with things, and I probably would downgrade my rating.
Here's a good example of downgrading your rating based on finding out how much they twisted the truth:
Now I'd rate that a 100!
But when you find out it's been photoshopped and someone proves it by showing you the real horse:
My rating drops down to 0. What a bummer.