diff --git a/.idea/codeStyleSettings.xml b/.idea/codeStyleSettings.xml
index c0cd70c05cd..9709eef0f2a 100644
--- a/.idea/codeStyleSettings.xml
+++ b/.idea/codeStyleSettings.xml
@@ -60,6 +60,9 @@
         <option name="WHILE_BRACE_FORCE" value="1" />
         <option name="FOR_BRACE_FORCE" value="1" />
         <option name="FIELD_ANNOTATION_WRAP" value="0" />
+        <MarkdownNavigatorCodeStyleSettings>
+          <option name="RIGHT_MARGIN" value="72" />
+        </MarkdownNavigatorCodeStyleSettings>
         <XML>
           <option name="XML_LEGACY_SETTINGS_IMPORTED" value="true" />
         </XML>
diff --git a/compiler/ir/backend.common/src/org/jetbrains/kotlin/backend/common/AbstractClosureAnnotator.kt b/compiler/ir/backend.common/src/org/jetbrains/kotlin/backend/common/AbstractClosureAnnotator.kt
index 4d64e8d174b..ae8b5d6dc21 100644
--- a/compiler/ir/backend.common/src/org/jetbrains/kotlin/backend/common/AbstractClosureAnnotator.kt
+++ b/compiler/ir/backend.common/src/org/jetbrains/kotlin/backend/common/AbstractClosureAnnotator.kt
@@ -28,57 +28,26 @@ import org.jetbrains.kotlin.ir.visitors.acceptVoid
 import org.jetbrains.kotlin.resolve.DescriptorUtils
 import java.util.*
 
-class Closure(
-        val capturedThisReferences: List<ClassDescriptor>,
-        val capturedReceiverParameters: List<ReceiverParameterDescriptor>,
-        val capturedValues: List<ValueDescriptor>
-)
+class Closure(val capturedValues: List<ValueDescriptor>)
 
 abstract class AbstractClosureAnnotator : IrElementVisitorVoid {
     protected abstract fun recordFunctionClosure(functionDescriptor: FunctionDescriptor, closure: Closure)
     protected abstract fun recordClassClosure(classDescriptor: ClassDescriptor, closure: Closure)
 
     private class ClosureBuilder(val owner: DeclarationDescriptor) {
-        val capturedThisReferences = mutableSetOf<ClassDescriptor>()
-        val capturedReceiverParameters = mutableSetOf<ReceiverParameterDescriptor>()
         val capturedValues = mutableSetOf<ValueDescriptor>()
 
-        fun buildClosure() = Closure(
-                capturedThisReferences.toList(),
-                capturedReceiverParameters.toList(),
-                capturedValues.toList()
-        )
+        fun buildClosure() = Closure(capturedValues.toList())
 
         fun addNested(closure: Closure) {
-            fillInCapturedThisReferences(closure)
-            fillInNestedClosure(capturedReceiverParameters, closure.capturedReceiverParameters)
             fillInNestedClosure(capturedValues, closure.capturedValues)
         }
 
-        private fun fillInCapturedThisReferences(closure: Closure) {
-            if (owner is ClassDescriptor) {
-                closure.capturedThisReferences.filterTo(capturedThisReferences) { it != owner }
-            }
-            else if (owner is CallableMemberDescriptor && owner.dispatchReceiverParameter != null) {
-                val ownerClass = owner.containingDeclaration as? ClassDescriptor
-                closure.capturedThisReferences.filterTo(capturedThisReferences) { it != ownerClass }
-            }
-        }
-
         private fun <T : CallableDescriptor> fillInNestedClosure(destination: MutableSet<T>, nested: List<T>) {
             nested.filterTo(destination) {
                 it.containingDeclaration != owner
             }
         }
-
-        fun addCapturedThis(classDescriptor: ClassDescriptor) {
-            if (owner is ClassDescriptor && owner != classDescriptor) {
-                capturedThisReferences.add(classDescriptor)
-            }
-            else if (owner is CallableMemberDescriptor && owner.containingDeclaration != classDescriptor) {
-                capturedThisReferences.add(classDescriptor)
-            }
-        }
     }
 
     private val closuresStack = ArrayDeque<ClosureBuilder>()
@@ -127,7 +96,8 @@ abstract class AbstractClosureAnnotator : IrElementVisitorVoid {
     }
 
     override fun visitVariableAccess(expression: IrValueAccessExpression) {
-        val closureBuilder = closuresStack.peek()
+        val closureBuilder = closuresStack.peek() ?: return
+
         val variableDescriptor = expression.descriptor
         if (variableDescriptor.containingDeclaration != closureBuilder.owner) {
             closureBuilder.capturedValues.add(variableDescriptor)
diff --git a/compiler/ir/backend.jvm/backend.jvm.iml b/compiler/ir/backend.jvm/backend.jvm.iml
index fe10d927fa6..f62fe97c7c5 100644
--- a/compiler/ir/backend.jvm/backend.jvm.iml
+++ b/compiler/ir/backend.jvm/backend.jvm.iml
@@ -13,6 +13,7 @@
     <orderEntry type="module" module-name="descriptors" />
     <orderEntry type="module" module-name="backend" />
     <orderEntry type="module" module-name="ir.psi2ir" />
+    <orderEntry type="module" module-name="backend.common" />
     <orderEntry type="module" module-name="frontend.java" />
   </component>
 </module>
\ No newline at end of file
diff --git a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/JvmLower.kt b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/JvmLower.kt
index e00245e5649..c90afbdd58d 100644
--- a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/JvmLower.kt
+++ b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/JvmLower.kt
@@ -33,6 +33,7 @@ class JvmLower(val context: JvmBackendContext) {
         PropertiesLowering().lower(irFile)
         InterfaceLowering(context.state).runOnFile(irFile)
         InterfaceDelegationLowering(context.state).runOnFile(irFile)
+        LocalFunctionsLowering(context).runOnFile(irFile)
         EnumClassLowering(context).runOnFile(irFile)
         ObjectClassLowering(context).runOnFile(irFile)
         InitializersLowering(context).runOnFile(irFile)
diff --git a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/ExpressionCodegen.kt b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/ExpressionCodegen.kt
index e75f8ac3fd4..8371e775160 100644
--- a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/ExpressionCodegen.kt
+++ b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/ExpressionCodegen.kt
@@ -312,7 +312,10 @@ class ExpressionCodegen(
     }
 
     private fun generateLocal(descriptor: CallableDescriptor, type: Type): StackValue {
-        StackValue.local(frame.getIndex(descriptor), type).put(type, mv)
+        val index = frame.getIndex(descriptor).apply {
+            if (this < 0) throw AssertionError("Non-mapped local variable descriptor: $descriptor")
+        }
+        StackValue.local(index, type).put(type, mv)
         return onStack(type)
     }
 
diff --git a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/FunctionCodegen.kt b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/FunctionCodegen.kt
index ada65b67cf8..1f5751b40dc 100644
--- a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/FunctionCodegen.kt
+++ b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/FunctionCodegen.kt
@@ -26,6 +26,7 @@ import org.jetbrains.kotlin.codegen.state.GenerationState
 import org.jetbrains.kotlin.descriptors.ClassConstructorDescriptor
 import org.jetbrains.kotlin.descriptors.FunctionDescriptor
 import org.jetbrains.kotlin.ir.declarations.IrFunction
+import org.jetbrains.kotlin.ir.util.dump
 import org.jetbrains.kotlin.resolve.DescriptorUtils
 import org.jetbrains.kotlin.resolve.jvm.AsmTypes
 import org.jetbrains.kotlin.resolve.jvm.jvmSignature.JvmMethodParameterKind
diff --git a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/lower/LocalFunctionsLowering.kt b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/lower/LocalFunctionsLowering.kt
new file mode 100644
index 00000000000..e5244947de6
--- /dev/null
+++ b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/lower/LocalFunctionsLowering.kt
@@ -0,0 +1,359 @@
+/*
+ * Copyright 2010-2016 JetBrains s.r.o.
+ *
+ * Licensed under the Apache License, Version 2.0 (the "License");
+ * you may not use this file except in compliance with the License.
+ * You may obtain a copy of the License at
+ *
+ * http://www.apache.org/licenses/LICENSE-2.0
+ *
+ * Unless required by applicable law or agreed to in writing, software
+ * distributed under the License is distributed on an "AS IS" BASIS,
+ * WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+ * See the License for the specific language governing permissions and
+ * limitations under the License.
+ */
+
+package org.jetbrains.kotlin.backend.jvm.lower
+
+import org.jetbrains.kotlin.backend.common.AbstractClosureAnnotator
+import org.jetbrains.kotlin.backend.common.Closure
+import org.jetbrains.kotlin.backend.jvm.ClassLoweringPass
+import org.jetbrains.kotlin.backend.jvm.JvmBackendContext
+import org.jetbrains.kotlin.descriptors.*
+import org.jetbrains.kotlin.descriptors.impl.SimpleFunctionDescriptorImpl
+import org.jetbrains.kotlin.descriptors.impl.ValueParameterDescriptorImpl
+import org.jetbrains.kotlin.ir.IrElement
+import org.jetbrains.kotlin.ir.IrStatement
+import org.jetbrains.kotlin.ir.declarations.IrClass
+import org.jetbrains.kotlin.ir.declarations.IrDeclaration
+import org.jetbrains.kotlin.ir.declarations.IrFunction
+import org.jetbrains.kotlin.ir.declarations.impl.IrFunctionImpl
+import org.jetbrains.kotlin.ir.expressions.*
+import org.jetbrains.kotlin.ir.expressions.impl.*
+import org.jetbrains.kotlin.ir.util.transformFlat
+import org.jetbrains.kotlin.ir.visitors.IrElementTransformerVoid
+import org.jetbrains.kotlin.ir.visitors.IrElementVisitorVoid
+import org.jetbrains.kotlin.ir.visitors.acceptChildrenVoid
+import org.jetbrains.kotlin.ir.visitors.transformChildrenVoid
+import org.jetbrains.kotlin.name.Name
+import org.jetbrains.kotlin.resolve.descriptorUtil.parents
+import org.jetbrains.kotlin.resolve.descriptorUtil.parentsWithSelf
+import org.jetbrains.kotlin.types.KotlinType
+import java.util.*
+
+class LocalFunctionsLowering(val context: JvmBackendContext): ClassLoweringPass {
+    override fun lower(irClass: IrClass) {
+        irClass.declarations.transformFlat { memberDeclaration ->
+            if (memberDeclaration is IrFunction)
+                LocalFunctionsTransformer(memberDeclaration).lowerLocalFunctions()
+            else
+                null
+        }
+    }
+
+    private class LocalFunctionContext(val declaration: IrFunction) {
+        lateinit var closure: Closure
+
+        val closureParametersCount: Int get() = closure.capturedValues.size
+
+        lateinit var transformedDescriptor: FunctionDescriptor
+
+        val old2new: MutableMap<ValueDescriptor, ValueParameterDescriptor> = HashMap()
+
+        var index: Int = -1
+
+        override fun toString(): String =
+                "LocalFunctionContext for ${declaration.descriptor}"
+    }
+
+    private inner class LocalFunctionsTransformer(val memberFunction: IrFunction) {
+        val localFunctions: MutableMap<FunctionDescriptor, LocalFunctionContext> = LinkedHashMap()
+        val new2old: MutableMap<ValueParameterDescriptor, ValueDescriptor> = HashMap()
+
+        fun lowerLocalFunctions(): List<IrDeclaration>? {
+            collectLocalFunctions()
+            if (localFunctions.isEmpty()) return null
+
+            collectClosures()
+
+            transformDescriptors()
+
+            rewriteBodies()
+
+            return collectRewrittenDeclarations()
+        }
+
+        private fun collectRewrittenDeclarations(): ArrayList<IrDeclaration> =
+                ArrayList<IrDeclaration>(localFunctions.size + 1).apply {
+                    add(memberFunction)
+
+                    localFunctions.values.mapTo(this) {
+                        val original = it.declaration
+                        IrFunctionImpl(
+                                original.startOffset, original.endOffset, original.origin,
+                                it.transformedDescriptor,
+                                original.body
+                        )
+                    }
+                }
+
+        private inner class FunctionBodiesRewriter(val localFunctionContext: LocalFunctionContext?) : IrElementTransformerVoid() {
+
+            override fun visitClass(declaration: IrClass): IrStatement {
+                // ignore local classes for now
+                return declaration
+            }
+
+            override fun visitFunction(declaration: IrFunction): IrStatement {
+                // replace local function definition with an empty composite
+                return IrCompositeImpl(declaration.startOffset, declaration.endOffset, context.builtIns.unitType)
+            }
+
+            override fun visitGetValue(expression: IrGetValue): IrExpression {
+                val remapped = localFunctionContext?.let { it.old2new[expression.descriptor] }
+                return if (remapped == null)
+                    expression
+                else
+                    IrGetValueImpl(expression.startOffset, expression.endOffset, remapped, expression.origin)
+            }
+
+            override fun visitCall(expression: IrCall): IrExpression {
+                expression.transformChildrenVoid(this)
+
+                val oldCallee = expression.descriptor.original
+                val localFunctionData = localFunctions[oldCallee] ?: return expression
+
+                val newCallee = localFunctionData.transformedDescriptor
+
+                val newCall = createNewCall(expression, newCallee).fillArguments(localFunctionData, expression)
+
+                return newCall
+            }
+
+            private fun <T : IrMemberAccessExpression> T.fillArguments(calleeContext: LocalFunctionContext, oldExpression: IrMemberAccessExpression): T {
+                val closureParametersCount = calleeContext.closureParametersCount
+
+                mapValueParametersIndexed { index, newValueParameterDescriptor ->
+                    val capturedValueDescriptor = new2old[newValueParameterDescriptor] ?:
+                                                  throw AssertionError("Non-mapped parameter $newValueParameterDescriptor")
+                    if (index >= closureParametersCount)
+                        oldExpression.getValueArgument(capturedValueDescriptor as ValueParameterDescriptor)
+                    else {
+                        val remappedValueDescriptor = localFunctionContext?.let { it.old2new[capturedValueDescriptor] }
+                        IrGetValueImpl(oldExpression.startOffset, oldExpression.endOffset,
+                                       remappedValueDescriptor ?: capturedValueDescriptor)
+                    }
+
+                }
+
+                dispatchReceiver = oldExpression.dispatchReceiver
+                extensionReceiver = oldExpression.extensionReceiver
+
+                return this
+            }
+
+            override fun visitCallableReference(expression: IrCallableReference): IrExpression {
+                expression.transformChildrenVoid(this)
+
+                val oldCallee = expression.descriptor.original
+                val localFunctionData = localFunctions[oldCallee] ?: return expression
+                val newCallee = localFunctionData.transformedDescriptor
+
+                val newCallableReference = IrCallableReferenceImpl(
+                        expression.startOffset, expression.endOffset,
+                        expression.type, // TODO functional type for transformed descriptor
+                        newCallee,
+                        remapTypeArguments(expression, newCallee),
+                        expression.origin
+                ).fillArguments(localFunctionData, expression)
+
+                return newCallableReference
+            }
+
+            override fun visitReturn(expression: IrReturn): IrExpression {
+                expression.transformChildrenVoid(this)
+
+                val oldReturnTarget = expression.returnTarget
+                val localFunctionData = localFunctions[oldReturnTarget] ?: return expression
+                val newReturnTarget = localFunctionData.transformedDescriptor
+
+                return IrReturnImpl(expression.startOffset, expression.endOffset, newReturnTarget, expression.value)
+            }
+        }
+
+        private fun rewriteFunctionDeclaration(irFunction: IrFunction, localFunctionContext: LocalFunctionContext?) {
+            irFunction.transformChildrenVoid(FunctionBodiesRewriter(localFunctionContext))
+        }
+
+        private fun rewriteBodies() {
+            localFunctions.values.forEach {
+                rewriteFunctionDeclaration(it.declaration, it)
+            }
+
+            rewriteFunctionDeclaration(memberFunction, null)
+        }
+
+        private fun createNewCall(oldCall: IrCall, newCallee: FunctionDescriptor) =
+                if (oldCall is IrCallWithShallowCopy)
+                    oldCall.shallowCopy(oldCall.origin, newCallee, oldCall.superQualifier)
+                else
+                    IrCallImpl(
+                            oldCall.startOffset, oldCall.endOffset,
+                            newCallee,
+                            remapTypeArguments(oldCall, newCallee),
+                            oldCall.origin, oldCall.superQualifier
+                    )
+
+        private fun remapTypeArguments(oldExpression: IrMemberAccessExpression, newCallee: FunctionDescriptor): Map<TypeParameterDescriptor, KotlinType>? {
+            val oldCallee = oldExpression.descriptor
+
+            return if (oldCallee.typeParameters.isEmpty())
+                null
+            else oldCallee.typeParameters.associateBy(
+                    { newCallee.typeParameters[it.index] },
+                    { oldExpression.getTypeArgument(it)!! }
+            )
+        }
+
+        private fun transformDescriptors() {
+            localFunctions.values.forEach {
+                it.transformedDescriptor = createTransformedDescriptor(it)
+            }
+        }
+
+        private fun suggestLocalName(descriptor: DeclarationDescriptor): String {
+            val localFunctionContext = localFunctions[descriptor]
+            return if (localFunctionContext != null && localFunctionContext.index >= 0)
+                "lambda-${localFunctionContext.index}"
+            else
+                descriptor.name.asString()
+        }
+
+        private fun generateNameForLiftedFunction(functionDescriptor: FunctionDescriptor): Name =
+                Name.identifier(
+                        functionDescriptor.parentsWithSelf
+                                .takeWhile { it is FunctionDescriptor }
+                                .toList().reversed()
+                                .map { suggestLocalName(it) }
+                                .joinToString(separator = "$")
+                        )
+
+        private fun createTransformedDescriptor(localFunctionContext: LocalFunctionContext): FunctionDescriptor {
+            val oldDescriptor = localFunctionContext.declaration.descriptor
+
+            val memberOwner = memberFunction.descriptor.containingDeclaration
+            val newDescriptor = SimpleFunctionDescriptorImpl.create(
+                    memberOwner,
+                    oldDescriptor.annotations,
+                    generateNameForLiftedFunction(oldDescriptor),
+                    CallableMemberDescriptor.Kind.SYNTHESIZED,
+                    oldDescriptor.source
+            )
+
+            val closureParametersCount = localFunctionContext.closureParametersCount
+            val newValueParametersCount = closureParametersCount + oldDescriptor.valueParameters.size
+
+            val newDispatchReceiverParameter =
+                    if (memberOwner is ClassDescriptor && oldDescriptor.dispatchReceiverParameter != null)
+                        memberOwner.thisAsReceiverParameter
+                    else
+                        null
+
+            // Do not substitute type parameters for now.
+            val newTypeParameters = oldDescriptor.typeParameters
+
+            val newValueParameters = ArrayList<ValueParameterDescriptor>(newValueParametersCount).apply {
+                localFunctionContext.closure.capturedValues.mapIndexedTo(this) { i, capturedValueDescriptor ->
+                    createUnsubstitutedCapturedValueParameter(newDescriptor, capturedValueDescriptor, i).apply {
+                        localFunctionContext.recordRemapped(capturedValueDescriptor, this)
+                    }
+                }
+
+                oldDescriptor.valueParameters.mapIndexedTo(this) { i, oldValueParameterDescriptor ->
+                    createUnsubstitutedParameter(newDescriptor, oldValueParameterDescriptor, closureParametersCount + i).apply {
+                        localFunctionContext.recordRemapped(oldValueParameterDescriptor, this)
+                    }
+                }
+            }
+
+            newDescriptor.initialize(
+                    oldDescriptor.extensionReceiverParameter?.type,
+                    newDispatchReceiverParameter,
+                    newTypeParameters,
+                    newValueParameters,
+                    oldDescriptor.returnType,
+                    Modality.FINAL,
+                    Visibilities.PRIVATE
+            )
+
+            return newDescriptor
+        }
+
+        private fun LocalFunctionContext.recordRemapped(oldDescriptor: ValueDescriptor, newDescriptor: ValueParameterDescriptor): ValueParameterDescriptor {
+            old2new[oldDescriptor] = newDescriptor
+            new2old[newDescriptor] = oldDescriptor
+            return newDescriptor
+        }
+
+        private fun createUnsubstitutedCapturedValueParameter(
+                newParameterOwner: CallableMemberDescriptor,
+                valueDescriptor: ValueDescriptor,
+                index: Int
+        ): ValueParameterDescriptor =
+                ValueParameterDescriptorImpl(
+                        newParameterOwner, null, index,
+                        valueDescriptor.annotations, valueDescriptor.name, valueDescriptor.type,
+                        false, false, false, false, null, valueDescriptor.source
+                )
+
+        private fun createUnsubstitutedParameter(
+                newParameterOwner: CallableMemberDescriptor,
+                valueParameterDescriptor: ValueParameterDescriptor,
+                newIndex: Int
+        ): ValueParameterDescriptor =
+                valueParameterDescriptor.copy(newParameterOwner, valueParameterDescriptor.name, newIndex)
+
+
+        private fun collectClosures() {
+            memberFunction.acceptChildrenVoid(object : AbstractClosureAnnotator() {
+                override fun visitClass(declaration: IrClass) {
+                    // ignore local classes for now
+                    return
+                }
+
+                override fun recordFunctionClosure(functionDescriptor: FunctionDescriptor, closure: Closure) {
+                    localFunctions[functionDescriptor]?.closure = closure
+                }
+
+                override fun recordClassClosure(classDescriptor: ClassDescriptor, closure: Closure) {
+                    // ignore local classes for now
+                }
+            })
+        }
+
+        private fun collectLocalFunctions() {
+            memberFunction.acceptChildrenVoid(object : IrElementVisitorVoid {
+                var lambdasCount = 0
+
+                override fun visitElement(element: IrElement) {
+                    element.acceptChildrenVoid(this)
+                }
+
+                override fun visitFunction(declaration: IrFunction) {
+                    declaration.acceptChildrenVoid(this)
+                    val localFunctionContext = LocalFunctionContext(declaration)
+                    localFunctions[declaration.descriptor] = localFunctionContext
+                    if (declaration.descriptor.name.isSpecial) {
+                        localFunctionContext.index = lambdasCount++
+                    }
+                }
+
+                override fun visitClass(declaration: IrClass) {
+                    // ignore local classes for now
+                }
+            })
+        }
+    }
+
+}
\ No newline at end of file
diff --git a/compiler/ir/ir.psi2ir/src/org/jetbrains/kotlin/psi2ir/generators/LocalFunctionGenerator.kt b/compiler/ir/ir.psi2ir/src/org/jetbrains/kotlin/psi2ir/generators/LocalFunctionGenerator.kt
index 3be5da340da..d60e21f035a 100644
--- a/compiler/ir/ir.psi2ir/src/org/jetbrains/kotlin/psi2ir/generators/LocalFunctionGenerator.kt
+++ b/compiler/ir/ir.psi2ir/src/org/jetbrains/kotlin/psi2ir/generators/LocalFunctionGenerator.kt
@@ -41,7 +41,7 @@ class LocalFunctionGenerator(statementGenerator: StatementGenerator) : Statement
         irBlock.statements.add(irFun)
 
         irBlock.statements.add(IrCallableReferenceImpl(ktLambda.startOffset, ktLambda.endOffset, lambdaExpressionType,
-                                                     lambdaDescriptor, null, IrStatementOrigin.LAMBDA))
+                                                       lambdaDescriptor, null, IrStatementOrigin.LAMBDA))
 
         return irBlock
     }
@@ -59,7 +59,7 @@ class LocalFunctionGenerator(statementGenerator: StatementGenerator) : Statement
                 irBlock.statements.add(irFun)
 
                 irBlock.statements.add(IrCallableReferenceImpl(ktFun.startOffset, ktFun.endOffset, funExpressionType,
-                                                             irFun.descriptor, null, IrStatementOrigin.ANONYMOUS_FUNCTION))
+                                                               irFun.descriptor, null, IrStatementOrigin.ANONYMOUS_FUNCTION))
 
                 irBlock
             }
diff --git a/compiler/ir/ir.tree/src/org/jetbrains/kotlin/ir/expressions/IrMemberAccessExpression.kt b/compiler/ir/ir.tree/src/org/jetbrains/kotlin/ir/expressions/IrMemberAccessExpression.kt
index 90893fb7594..c8279900ecf 100644
--- a/compiler/ir/ir.tree/src/org/jetbrains/kotlin/ir/expressions/IrMemberAccessExpression.kt
+++ b/compiler/ir/ir.tree/src/org/jetbrains/kotlin/ir/expressions/IrMemberAccessExpression.kt
@@ -54,3 +54,10 @@ inline fun <T : IrMemberAccessExpression> T.mapValueParameters(transform: (Value
     return this
 }
 
+inline fun <T : IrMemberAccessExpression> T.mapValueParametersIndexed(transform: (Int, ValueParameterDescriptor) -> IrExpression?): T {
+    descriptor.valueParameters.forEach {
+        putValueArgument(it.index, transform(it.index, it))
+    }
+    return this
+}
+
diff --git a/compiler/ir/ir.tree/src/org/jetbrains/kotlin/ir/util/DeepCopyIrTree.kt b/compiler/ir/ir.tree/src/org/jetbrains/kotlin/ir/util/DeepCopyIrTree.kt
index f78956d7c88..56050e1e28b 100644
--- a/compiler/ir/ir.tree/src/org/jetbrains/kotlin/ir/util/DeepCopyIrTree.kt
+++ b/compiler/ir/ir.tree/src/org/jetbrains/kotlin/ir/util/DeepCopyIrTree.kt
@@ -51,7 +51,6 @@ open class DeepCopyIrTree : IrElementTransformerVoid() {
     protected open fun mapValueReference(descriptor: ValueDescriptor) = descriptor
     protected open fun mapVariableReference(descriptor: VariableDescriptor) = descriptor
     protected open fun mapPropertyReference(descriptor: PropertyDescriptor) = descriptor
-    protected open fun mapReceiverParameterReference(descriptor: ReceiverParameterDescriptor) = descriptor
     protected open fun mapCallee(descriptor: CallableDescriptor) = descriptor
     protected open fun mapDelegatedConstructorCallee(descriptor: ClassConstructorDescriptor) = descriptor
     protected open fun mapEnumConstructorCallee(descriptor: ClassConstructorDescriptor) = descriptor
diff --git a/compiler/testData/ir/box/closureConversion1.kt b/compiler/testData/ir/box/closureConversion1.kt
new file mode 100644
index 00000000000..486df9872db
--- /dev/null
+++ b/compiler/testData/ir/box/closureConversion1.kt
@@ -0,0 +1,6 @@
+fun foo(x: String): String {
+    fun bar(y: String) = x + y
+    return bar("K")
+}
+
+fun box() = foo("O")
\ No newline at end of file
diff --git a/compiler/testData/ir/box/closureConversion2.kt b/compiler/testData/ir/box/closureConversion2.kt
new file mode 100644
index 00000000000..806aad1fa65
--- /dev/null
+++ b/compiler/testData/ir/box/closureConversion2.kt
@@ -0,0 +1,8 @@
+fun <X : Any> foo(x: X): String {
+    fun <Y : Any> bar(y: Y) =
+            x.toString() + y.toString()
+
+    return bar("K")
+}
+
+fun box() = foo("O")
\ No newline at end of file
diff --git a/compiler/testData/ir/box/closureConversion3.kt b/compiler/testData/ir/box/closureConversion3.kt
new file mode 100644
index 00000000000..7f0e7d4647b
--- /dev/null
+++ b/compiler/testData/ir/box/closureConversion3.kt
@@ -0,0 +1,11 @@
+fun foo(x: String): String {
+    fun bar(y: String): String {
+        fun qux(z: String): String =
+                x + y + z
+        return qux("")
+    }
+    return bar("K")
+}
+
+fun box(): String =
+        foo("O")
\ No newline at end of file
diff --git a/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrOnlyBoxCodegenTestGenerated.java b/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrOnlyBoxCodegenTestGenerated.java
index 2b01f478f7e..66f033ee55f 100644
--- a/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrOnlyBoxCodegenTestGenerated.java
+++ b/compiler/tests/org/jetbrains/kotlin/codegen/ir/IrOnlyBoxCodegenTestGenerated.java
@@ -41,6 +41,24 @@ public class IrOnlyBoxCodegenTestGenerated extends AbstractIrBlackBoxCodegenTest
         doTest(fileName);
     }
 
+    @TestMetadata("closureConversion1.kt")
+    public void testClosureConversion1() throws Exception {
+        String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/ir/box/closureConversion1.kt");
+        doTest(fileName);
+    }
+
+    @TestMetadata("closureConversion2.kt")
+    public void testClosureConversion2() throws Exception {
+        String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/ir/box/closureConversion2.kt");
+        doTest(fileName);
+    }
+
+    @TestMetadata("closureConversion3.kt")
+    public void testClosureConversion3() throws Exception {
+        String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/ir/box/closureConversion3.kt");
+        doTest(fileName);
+    }
+
     @TestMetadata("enumClass.kt")
     public void testEnumClass() throws Exception {
         String fileName = KotlinTestUtils.navigationMetadata("compiler/testData/ir/box/enumClass.kt");
diff --git a/compiler/tests/org/jetbrains/kotlin/ir/AbstractClosureAnnotatorTestCase.kt b/compiler/tests/org/jetbrains/kotlin/ir/AbstractClosureAnnotatorTestCase.kt
index b639cfeb1d1..471bbcd3aa4 100644
--- a/compiler/tests/org/jetbrains/kotlin/ir/AbstractClosureAnnotatorTestCase.kt
+++ b/compiler/tests/org/jetbrains/kotlin/ir/AbstractClosureAnnotatorTestCase.kt
@@ -66,12 +66,6 @@ abstract class AbstractClosureAnnotatorTestCase : AbstractIrGeneratorTestCase()
             }
 
             private fun printClosure(closure: Closure) {
-                closure.capturedThisReferences.forEach {
-                    actualOut.println("  'this' for ${it.name}")
-                }
-                closure.capturedReceiverParameters.forEach {
-                    actualOut.println("  receiver for ${it.containingDeclaration.name}")
-                }
                 closure.capturedValues.forEach {
                     actualOut.println("  variable ${it.name}")
                 }