Correct. If the source is FHD, the 720p TV downscales it to 720p and it depends on the TVs capability on how the picture appears.
When someone says you cannot distinguish between a HD ready and FHD TV from correct viewing distance, It means that when FHD TV is displaying 1080p scene and a HD ready TV is displaying the same scene in 720p, You cannot distinguish from >7-8 feet for 42".
If both TVs are displaying 1080p, there will be detail loss due to downscaling which is again hardly perceptible to human eyes. But detail loss is a detil loss nevertheless. Only >95% people cannot make out from that distance.
If you have a BR player and lots of 1080p content at your disposal, you wont even ask if you require a FHD or HD ready TV. FHD it is. But if your usage is DTH, DVD, 720p Upscaled content, A HD ready TV would suffice for all technical and practical reasons if you are not born with an eye of an eagle.
Baseline is, when fed with native content 9720p for HD ready Tv and 1080p for FHD TV), the sizes upto 50" will not show advantages of FHD over HD ready at usual viewing distances. When 1080p is fed to both, there is loss of data during down-conversion which is there.