I've taken Yahoo Privacy statement and modified for my site. Now when I apply my site for Adsense approval will Google reject on this basis of "copied" material? I don't have anything else "copied", I think legal templates such as TOS, Privacy may have no issues wrt copyright.
It has nothing to do with your Privacy Policy, I believe that it has to do with the posts on your site itself.
You could just generate one for your site this does a pretty good job: http://www.webmasters-cavern.com/tools/tosgen/index.php
If you copy it, make sure you change it so it's appropriate to your site.. A long time ago i made a post here and offered other people to copy their privacy statement from mine (before the automated privacy-page generators were around) and some clown copied and pasted it and didnt even bother to read it and change the references to MY site to his own..