diff --git a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/Errors.java b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/Errors.java
index c947ed0b775..f976028d4ae 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/Errors.java
+++ b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/Errors.java
@@ -649,7 +649,6 @@ public interface Errors {
     DiagnosticFactory0<JetWhenConditionInRange> TYPE_MISMATCH_IN_RANGE = DiagnosticFactory0.create(ERROR, WHEN_CONDITION_IN_RANGE);
 
     DiagnosticFactory1<JetParameter, JetType> EXPECTED_PARAMETER_TYPE_MISMATCH = DiagnosticFactory1.create(ERROR);
-    DiagnosticFactory1<JetTypeReference, JetType> EXPECTED_RETURN_TYPE_MISMATCH = DiagnosticFactory1.create(ERROR);
     DiagnosticFactory2<JetFunction, Integer, List<JetType>> EXPECTED_PARAMETERS_NUMBER_MISMATCH =
             DiagnosticFactory2.create(ERROR, FUNCTION_PARAMETERS);
 
diff --git a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/rendering/DefaultErrorMessages.java b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/rendering/DefaultErrorMessages.java
index 282096b79f0..34d01de87d6 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/rendering/DefaultErrorMessages.java
+++ b/compiler/frontend/src/org/jetbrains/kotlin/diagnostics/rendering/DefaultErrorMessages.java
@@ -360,7 +360,6 @@ public class DefaultErrorMessages {
                 "Expected a value of type {0}. Assignment operation is not an expression, so it does not return any value", RENDER_TYPE);
 
         MAP.put(EXPECTED_PARAMETER_TYPE_MISMATCH, "Expected parameter of type {0}", RENDER_TYPE);
-        MAP.put(EXPECTED_RETURN_TYPE_MISMATCH, "Expected return type {0}", RENDER_TYPE);
         MAP.put(EXPECTED_PARAMETERS_NUMBER_MISMATCH, "Expected {0,choice,0#no parameters|1#one parameter of type|1<{0,number,integer} parameters of types} {1}", null, RENDER_COLLECTION_OF_TYPES);
 
         MAP.put(IMPLICIT_CAST_TO_UNIT_OR_ANY, "Type is cast to ''{0}''. Please specify ''{0}'' as expected type, if you mean such cast",
diff --git a/compiler/frontend/src/org/jetbrains/kotlin/psi/JetFunctionNotStubbed.java b/compiler/frontend/src/org/jetbrains/kotlin/psi/JetFunctionNotStubbed.java
index 0f49e44cb09..cba9a2c9494 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/psi/JetFunctionNotStubbed.java
+++ b/compiler/frontend/src/org/jetbrains/kotlin/psi/JetFunctionNotStubbed.java
@@ -55,41 +55,32 @@ public abstract class JetFunctionNotStubbed extends JetTypeParameterListOwnerNot
 
     @Override
     public boolean hasDeclaredReturnType() {
-        return getTypeReference() != null;
+        return false;
     }
 
     @Override
     @Nullable
     public JetTypeReference getReceiverTypeReference() {
-        PsiElement child = getFirstChild();
-        while (child != null) {
-            IElementType tt = child.getNode().getElementType();
-            if (tt == JetTokens.LPAR || tt == JetTokens.COLON) break;
-            if (child instanceof JetTypeReference) {
-                return (JetTypeReference) child;
-            }
-            child = child.getNextSibling();
-        }
-
         return null;
     }
 
     @Override
     @Nullable
     public JetTypeReference getTypeReference() {
-        return TypeRefHelpersPackage.getTypeReference(this);
+        return null;
     }
 
     @Nullable
     @Override
     public JetTypeReference setTypeReference(@Nullable JetTypeReference typeRef) {
-        return TypeRefHelpersPackage.setTypeReference(this, getValueParameterList(), typeRef);
+        if (typeRef == null) return null;
+        throw new IllegalStateException("Function literals can't have type reference");
     }
 
     @Nullable
     @Override
     public PsiElement getColon() {
-        return findChildByType(JetTokens.COLON);
+        return null;
     }
 
     @Override
diff --git a/compiler/frontend/src/org/jetbrains/kotlin/types/expressions/FunctionsTypingVisitor.kt b/compiler/frontend/src/org/jetbrains/kotlin/types/expressions/FunctionsTypingVisitor.kt
index 36bafec883b..bbd73c2de17 100644
--- a/compiler/frontend/src/org/jetbrains/kotlin/types/expressions/FunctionsTypingVisitor.kt
+++ b/compiler/frontend/src/org/jetbrains/kotlin/types/expressions/FunctionsTypingVisitor.kt
@@ -196,16 +196,8 @@ public class FunctionsTypingVisitor(facade: ExpressionTypingInternals) : Express
             expectedReturnType: JetType?
     ): JetType? {
         val functionLiteral = expression.getFunctionLiteral()
-        val declaredReturnType = functionLiteral.getTypeReference()?.let {
-            val type = components.typeResolver.resolveType(context.scope, it, context.trace, true)
-            if (expectedReturnType != null && !TypeUtils.noExpectedType(expectedReturnType)
-                && !JetTypeChecker.DEFAULT.isSubtypeOf(type, expectedReturnType)) {
-                context.trace.report(EXPECTED_RETURN_TYPE_MISMATCH.on(it, expectedReturnType))
-            }
-            type
-        }
 
-        val expectedType = declaredReturnType ?: (expectedReturnType ?: NO_EXPECTED_TYPE)
+        val expectedType = expectedReturnType ?: NO_EXPECTED_TYPE
         val functionInnerScope = FunctionDescriptorUtil.getFunctionInnerScope(context.scope, functionDescriptor, context.trace)
         val newContext = context.replaceScope(functionInnerScope).replaceExpectedType(expectedType)
 
@@ -214,7 +206,7 @@ public class FunctionsTypingVisitor(facade: ExpressionTypingInternals) : Express
         val typeOfBodyExpression = // Type-check the body
                 components.expressionTypingServices.getBlockReturnedType(functionLiteral.getBodyExpression()!!, COERCION_TO_UNIT, newContext).type
 
-        return declaredReturnType ?: computeReturnTypeBasedOnReturnExpressions(functionLiteral, context, typeOfBodyExpression)
+        return computeReturnTypeBasedOnReturnExpressions(functionLiteral, context, typeOfBodyExpression)
     }
 
     private fun computeReturnTypeBasedOnReturnExpressions(