The most accurate term is Bullshitter but that is definitely not polite.
A more polite way to describe them would be to say that "they tell tall tales"
A tall tale is a story with unbelievable elements, related as if it
were true and factual. Some such stories are exaggerations of actual
events, for example fish stories ('the fish that got away') such as,
"that fish was so big, why I tell ya', it nearly sank the boat when I
pulled it in!"
Those two terms could be more accurate than fabulist, fabricator etc as those words imply that the person making up the facts expects to be believed or believes those made up facts themselves.
If someone is telling a story, and alters the facts to make the story better, even if they know that their audience knows the true facts behind the story, they may not be trying to deceive anyone, but just to improve the story so that it is more amusing.