It's not so much a case of embellishing but half remembered truths. I'm pretty sure that much of what the elven slaves in Tevinter knew about their past was an oral tradition. Apparently someone (Felicia Day I think) suggested they wrote it down on pieces of paper. Paper is not a very durable substance and many slaves aren't even taught to read, so I think word of mouth is far more likely. However, things can get altered in the telling and elaborated, that is part of the storytellers art, unless, of course, they are meant to remember things by rote to pass on.
Arlathan Forest is very near to modern day Tevinter and their seat of power. Therefore it seems likely that the attack on it was sudden and severe and that is why it succeeded. The mages were meant to have used both dragons (under their control) and the aid of demons (likely blood magic) to subdue the elves. However, sinking the city was probably to prevent an elven counter offensive; there was something in the seat of elven power that could have been used against them. There has been much speculation in the past on the forums about a connection between Arlathan and the Golden City, but this seems unlikely considering the Tevinter were trying to reach the latter at a much later date and this would be unlikely if they knew it was a reflection of Arlathan in the Fade.
After destroying Arlathan, the Tevinter seem to have worked their way south. There was a great battle on Sundermount and likely another in the Brecillian Forest. The Tevinter mages were probably determined to kill or capture and enslave the elves because they didn't want them mounting a resistance to them in alliance with the barbarian tribes. At some point in all this the elves shut down the eluvians, probably to prevent the Tevinter getting hold of them. It is not beyond the bounds of possibility that this ensured that at least one, or more, ancient elf sleepers survived, who could still be awakened. There is a legend among the Dalish that these ancients were able to see the world, identify enemies and send spirits to inform and aid the elves but Felassan dismisses this as over romantic folk tales but if they could do this and they were the ones located in Arlathan, that could account for its total destruction by the Tevinter. I'm pretty sure that the "immortal" elven sleepers is the origin of the story that all elves were once immortal, although it could also be connected to their gods. If these were spirits that closely interacted with the mortal world, may be contact with them did prolong life and when they retreated back into the Fade, so "immortality" went with them.
I think that some of the ancient history is probably pretty close to what happened, particularly since the elven slaves probably had to witness daily, monuments and murals of their masters that recorded their victory. So in some ways if anyone might be accused of embellishment, it would be the Tevinter.
The Dalish are a different matter. They have been trying to piece together a culture from half remembered folk stories and what they have been able to find in ruins. Naturally they want to imagine they are restoring a glorious past but really have no idea of what that might be and have largely filled in the gaps of their knowledge with their own concept of elvishness. Ironically they seem to have become more like the human barbarian tribes that existed at the peak of Elvhanen than the actual ancient elves themselves.